What changed in this filing

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Item 7. Management’s Discussion and Analysis

2020-09-29 compared with 2019-10-01 · 443 added, 326 removed, 414 unchanged (65% of the section changed)

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FORWARD-LOOKING STATEMENTS

This Annual Report and the documents incorporated by reference in this Annual Report contain forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act, that involve substantial risks and uncertainties.

This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act, that involve substantial risks and uncertainties.

In some cases you can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek,” “should,” “will,” and “would,” or similar words.

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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;

the potential for additional goodwill impairment charges as a result of purchase accounting adjustments or otherwise;

our sensitivity to general economic conditions including changes in disposable income levels and consumer spending trends;

our ability to realize anticipated benefits of our acquisitions and dispositions, in particular, our acquisition of Supervalu;

the possibility that restructuring, asset impairment, and other charges and costs we may incur in connection with the sale or closure of our retail operations exceed our current expectations;

our reliance on the continued growth in sales of our higher margin natural and organic foods and non-food products in comparison to lower margin conventional grocery products;

increased competition in our industry as a result of increased distribution of natural, organic and specialty products by conventional grocery distributors and direct distribution of those products by large retailers and online distributors;

increased competition in our industry as a result of increased distribution of natural, organic and specialty products, and direct distribution of those products by large retailers and online distributors;

the possibility that restructuring, asset impairment, and other charges and costs we may incur in connection with the sale or closure of our retail operations will exceed our current expectations;

increased competition as a result of continuing consolidation of retailers in the natural product industry and the growth of supernatural chains;

our ability to timely and successfully deploy our warehouse management system throughout our distribution centers and our transportation management system across the Company and to achieve efficiencies and cost savings from these efforts;

the addition or loss of significant customers or material changes to our relationships with these customers;

volatility in fuel costs;

volatility in foreign exchange rates;

union-organizing activities that could cause labor relations difficulties and increased costs;

our ability to operate, and rely on third-party, reliable and secure technology systems;

the relatively low margins of our business;

moderated supplier promotional activity, including decreased forward buying opportunities;

the potential for additional asset impairment charges;

our sensitivity to inflationary and deflationary pressures;

the relatively low margins and economic sensitivity of our business;

the potential for disruptions in our supply chain by circumstances beyond our control;

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

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

moderated supplier promotional activity, including decreased forward buying opportunities;

union-organizing activities that could cause labor relations difficulties and increased costs;

volatility in fuel costs;

volatility in foreign exchange rates;

our ability to identify and successfully complete asset or business acquisitions.

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Business Overview

As a leading distributor of natural, organic, specialty, produce, and conventional grocery and non-food products, and provider of support services in the United States and Canada , we believe we are uniquely positioned to provide the broadest array of products and services to customers throughout North America.

As a leading distributor of natural, organic, specialty, produce, and conventional grocery and non-food products, and provider of retailer services in the United States and Canada , we believe we are uniquely positioned to provide the broadest array of products and services to customers throughout North America.

We offer more than 275,000 products consisting of national, regional and private label brands grouped into six product categories:

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Through our October 2018 acquisition of Supervalu, we are transforming into North America’s premier wholesaler with 55 distribution centers and warehouses representing approximately 29 million square feet of warehouse space.

We believe our total product assortment and service offerings are unmatched by our wholesale competitors.

We plan to aggressively pursue new business opportunities to independent retailers who operate diverse formats, regional and national chains, military commissaries, as well as international customers with wide-ranging needs.

During the fourth quarter of fiscal 2020, we determined we no longer met the held for sale criterion for a probable sale to be completed within 12 months for the Cub Foods business and the majority of the remaining Shoppers locations.

We reviewed our reportable segments and determined we were required to report Retail as a separate segment.

Our business is classified into two reportable segments:

Wholesale and Retail;

and also includes a manufacturing division and a branded product line division.

Fiscal 2020 and 2021

Fiscal 2019 was an historic year for UNFI as we completed the acquisition of Supervalu on October 22, 2018 and began to transform into North America’s leading wholesale distributor.

By the end of fiscal 2019, we had combined our natural and conventional businesses, operating with a single executive leadership team.

We neared completion of our Pacific Northwest distribution center consolidation whereby we will operate out of two distribution centers in the future compared to five previously, a move which will provide significant operating benefits.

We realized significant cost synergies, which were partially reinvested into the business.

In fiscal 2020, we successfully created a four-region operating structure with a sales organization aligned in a similar fashion.

We believe these changes will advance the execution of our long-term strategic and growth objectives.

We expect the competitive environment to remain challenging as other wholesalers look to capture new business, which is expected to lead to margin compression.

We believe we have cost savings opportunities that will more than offset the impact to gross margin as well as cross-selling opportunities that will increase sales.

In fiscal 2020, we moved closer to completing the integration of Supervalu and positioned ourselves for future growth.

Our operating performance in fiscal 2020 benefited from the shift in food-at-home consumption driven by the impact of the global COVID-19 pandemic, during which we fulfilled our role as a critical link in the North American food supply chain while prioritizing the safety and well-being of our associates.

By the end of fiscal 2020, we had completed the consolidation of five distribution centers in the Pacific Northwest into two distribution centers.

We expect this consolidation to provide significant future operating benefits.

We exceeded our original longer term cost synergy expectations, which called for a minimum of $185 million in savings related to the Supervalu acquisition, and believe we have further cost saving opportunities that we plan to pursue in fiscal 2021 and beyond.

We remain optimistic in our ability to grow through cross selling our diverse product and services offerings, innovating to grow our Private Brands, and capitalizing on the growing trends in eCommerce.

After investing in the growth of our business, we plan to use free cash flow to primarily reduce debt and improve our financial leverage.

Growth Drivers

A key component of our business and growth strategy has been to acquire wholesalers differentiated by product offerings, service offerings and market area.

On July 25, 2018, we entered into an Agreement and Plan of Merger pursuant to which we agreed to acquire Supervalu for an aggregate purchase price of approximately $2.3 billion, including the assumption of outstanding debt and liabilities.

The transaction closed on October 22, 2018.

Included in the liabilities assumed in the Supervalu acquisition were the Supervalu Senior Notes with a fair value of $546.6 million .

These Senior Notes were redeemed in the second quarter of fiscal 2019 following the required 30-day notice period, resulting in their satisfaction and discharge.

The redemption of the Senior Notes was financed by borrowings under our Term Loan Facility.

The acquisition of Supervalu accelerates our build out the store strategy, diversifies our customer base, enables cross-selling opportunities, expands market reach and scale, enhances 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, and conventional grocery and non-food products 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.

We maintain long-standing customer relationships with customers in our supernatural, supermarket, independent and other channels.

Some of these long-standing customer relationships are established through contracts with our customers in the form of distribution agreements.

We currently operate approximately 96 retail grocery stores acquired in the Supervalu acquisition.

We intend to thoughtfully and economically divest these stores.

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

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 continue to deliver significant synergies and accelerate potential growth.

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 enabling us to provide 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” strategy, 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 we operate, and are actively pursuing new customers.

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.

We also believe we have an opportunity to sell additional services to our customers to help them more efficiently operate their business while leveraging the infrastructure investments we’ve made.

Services often sold to our customers include coupon processing, consumer marketing, retail technology and payments, and consumer services.

We have realized and expect to continue to 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.

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.

We currently operate 71 retail grocery stores acquired in the Supervalu acquisition.

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

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

As a result, we revised our Consolidated Financial Statements to reclassify Retail from discontinued operations to continuing operations.

This change in financial statement presentation resulted in the inclusion of Retail’s results of operations, financial position, cash flows and related disclosures within continuing operations.

Prior periods presented in the Consolidated Financial Statements have been conformed to the current period presentation, resulting in Retail being presented in continuing operations for all periods.

Other Factors Affecting our Business

Our results are also impacted by macroeconomic and demographic trends, and changes in the food distribution market structure.

Over the past several decades, total food expenditures on a constant dollar basis within the United States has continued to increase in total, and the focus in recent decades on natural, organic and specialty foods has benefited the Company;

however, consumer spending in the food-away-from-home industry had increased steadily as a percentage of total food expenditures.

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

In fiscal 2020, prior to the COVID-19 pandemic, we incurred an increase in customer bankruptcies associated with weakness of certain of our large, regional natural and specialty independent customers.

The COVID-19 pandemic 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 until consumer behaviors return to pre-pandemic levels and businesses are allowed to fully reopen.

The economic rescission is expected to persist for some time due to and even after the near-term impact of COVID-19 has passed.

In general, economic recessions usually result in higher food-at home expenditures, which would be expected to continue to benefit our customers and result in higher sales.

The COVID-19 pandemic also drove significant growth in e-commerce utilization by grocery consumers, and we expect that trend to continue.

We expect to benefit from this trend through the growth of our traditional e-commerce (“dot.com”) customers, our EasyOptions B2B offering, which directly services non-traditional customers such bakeries or yoga studios, and through customers adopting our turnkey e-commerce platform.

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

Our wholesale customers manage their businesses independently and operate in a competitive environment.

We seek to obtain security interests and other credit support in connection with the financial accommodations we extend these customers;

however, we may incur additional credit or inventory charges related to our customers, as we expect the competitive environment to continue to lead to financial stress on some customers.

The magnitude of these risks increases as the size of our wholesale customers increases.

COVID-19 Impact

Impact and Response

As COVID-19 spread in March 2020, shelter-in-place orders and national and state emergencies were issued in the U.S.

and our business was designated as an essential business to enable us to continue to serve our customers during the COVID-19 pandemic.

During the initial spreading of the virus and implementation of shelter-in-place orders and restaurant closures, we experienced a surge in demand, as consumers undertook efforts to stock their pantries, and our related wholesale customer purchases surged, which impacted fill and service rates and depleted inventory levels.

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

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

These actions included:

engaging and hiring associates in March and April, and providing existing associates with temporary state of emergency wage increases and increased overtime to warehouse and driver and retail associates;

implementing heightened associate safety protocols to keep our workforce healthy, including social distancing practices, enhanced sanitization and COVID communications, implementing extensive safety protocols at our retail locations to protect associates and customers;

and evaluating and implementing safety practices for our drivers, sales team and corporate employees;

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 10 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 SKUs;

maintaining high food safety standards for customers and consumers related to COVID-19;

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

We experienced the following impacts from COVID-19 in the second half of fiscal 2020:

Sales increased due to the increase in food-at-home expenditures as a result of the economic and social responses to the COVID-19 pandemic.

Gross Profit.

Gross profit rates were adversely impacted by lower Wholesale vendor promotions, and lower Retail promotional activity.

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 are considered necessary to protect our employees, product quality standards, and wholesale and retail customers.

We estimate that we incurred approximately $56 million of incremental operating expenses related to our response to the pandemic and operating our business at a higher through-put capacity.

Operating Earnings.

Our business model allows us to leverage sales increases, 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, additional volume experienced by 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

At the onset of the COVID-19 pandemic, working capital was initially reduced providing a strong source of cash flows from operating activities.

As of the end of fiscal 2020, working capital had stabilized, as inventory, accounts payable and accounts receivable levels normalized to near pre-pandemic levels.

The surge in demand during the third quarter discussed above initially depleted inventory levels of continuing operations, and high sales throughput increased accounts payable and accounts receivable, as we worked to respond to our customers’ modified purchase patterns and prioritized the procurement of high-volume SKUs.

In response to the potential impact of the COVID-19 pandemic, we 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 meas ure to increase our cash position and preserve financial flexibility in light of uncertainty in the global markets resulting from the COVID-19 pandemic.

We expect our unused credit under our ABL Credit Facility will provide sufficient liquidity to continue to meet ongoing working capital needs.

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 food expenditures remains higher than recent historical precedent, and higher on a year-over-year basis.

We have increased our fill rates and service levels, as our and our vendors’ logistics capacity has grown, which had a positive effect on out of stock rates as compared to the initial surge in demand.

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 section “Impact of Inflation or Deflation” and above in the section “Other Factors Affecting our Business” we could also be affected by changes in product mix and product category inflation changes, especially if customers change their purchasing habits as a result of sustained downturns in the U.S.

and Canadian economies.

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 continuing elevated food-at-home expenditures and the resulting benefits to our wholesale customers are expected to outweigh product mix changes and other factors insofar as they affect 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 and any economic downturn, food-at-home purchasing levels, and 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 to the deductibility of interest expense and the ability to treat qualified improvement property as eligible for bonus depreciation as well as the ability to carry back net operating losses.

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 between March 2020 and December 2020 to be deferred until December 2021 and December 2022.

Prior to the application of the CARES Act, the Company 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 compared to the current 21% federal tax rate.

This resulted in a tax benefit of approximately $39.5 million , an estimate of which the Company recorded in the third quarter of Fiscal 2020, and which was finalized during the fourth quarter of fiscal 2020.

The entire tax benefit associated with the net operating loss carry back has been recorded as a current tax receivable in the Consolidated Balance Sheet as of August 1, 2020.

Distribution Center Network

Network Optimization and Construction

With the Supervalu acquisition, we acquired the Unified and AG Florida subsidiaries, which were previously acquired by Supervalu in June 2017 and December 2017, respectively, as well as the recently opened new distribution centers in Harrisburg, Pennsylvania and Joliet, Illinois.

As we integrate the distribution networks of Supervalu, Unified and AG Florida with our distribution network, expand our capacity and take steps to improve the efficiency of our warehouse capabilities including with our Joliet distribution center, we expect to incur start-up and transition costs including higher employee, trucking and inventory shrink costs.

During fiscal 2019, we incurred higher than expected distribution expenses from our distribution network realignment due to the following:

We incurred higher operating and shrink costs resulting from our transition from the Lancaster distribution center to our Harrisburg distribution center.

These transition costs sequentially improved in the third and fourth quarters of fiscal 2019, but we will incur higher operating costs on an ongoing basis in the Harrisburg facility than were historically incurred at Lancaster, which incorporated warehouse automation.

Within the Pacific Northwest, we are transferring the volume of five distribution centers and the related supporting off-site storage facilities into two distribution centers.

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.

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 optimization of the Pacific Northwest distribution network will also help deliver meaningful synergies contemplated in the acquisition of Supervalu in October 2018.

We accelerated the Pacific Northwest consolidation timeline to accelerate the realization of synergies from the Pacific Northwest consolidation through the operational start-up of Centralia and have not yet completed the consolidation or closure of any distribution centers as of August 3, 2019, but had completed the closure of an off-site storage facility.

Certain of these costs are expected to subside as we complete this work to realign our network, and we are working to both minimize these costs and obtain new business to further improve the efficiency of our transforming distribution network.

The construction of the new Centralia distribution center has been completed, and we are working on completing the expansion of the Ridgefield distribution center.

As a result, we plan to close and sell our Tacoma, Portland and Auburn warehouses, as well as reduce our dependency on outside storage and third-party logistics services.

Our Ridgefield, Washington facility expansion will add 541 thousand square feet (to a total of nearly 800 thousand square feet) to provide capacity for our growing customer base in the natural, organic and specialty channel.

This facility will deploy a warehouse automation solution that supports our slow-moving SKU portfolio.

Within the Pacific Northwest, we completed the transfer of the volume of five distribution centers and their related supporting off-site storage facilities into two distribution centers during fiscal 2020.

In fiscal 2021, we expect to achieve synergies and cost savings through eliminating inefficiencies, including incurring lower operating, shrink and off-site storage expenses.

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

We expanded 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 SKU portfolio.

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

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

We continue to evaluate our distribution center network to optimize its performance and expect to incur incremental expenses related to any future network realignment and are working to both minimize these costs and obtain new business to further improve the efficiency of our transforming distribution network.

In connection with our consolidation of distribution centers in the Pacific Northwest, during 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, and also incurred integration expenses, such as incremental employee and moving costs.

Distribution center integration costs and charges are recorded within Restructuring, acquisition and integration related expenses .

To support our continued growth within southern California, we began operating a newly leased facility with approximately 1.2 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.

On February 24, 2020, we executed a purchase option to acquire the real property of this 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

We received aggregate proceeds of $172.5 million in fiscal 2019 from the sale of operating and surplus distribution centers.

We closed on the sale and leaseback of two acquired Supervalu distribution centers and received aggregate proceeds of approximately $149.5 million .

One of these distribution centers was the last remaining distribution center Supervalu sold and leased back as part of a previous portfolio transaction, which contained a longer-term lease.

The other distribution center was a Pacific Northwest distribution center related to our consolidation strategy, which was subject to a short-term lease.

In addition, we sold two surplus facilities and received aggregate proceeds of approximately $23.0 million .

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

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

We sold five distribution centers in fiscal 2020 for aggregate consideration of $133.0 million, $38.0 million of which was received in the form of a short-term note receivable that we expect to receive the remaining proceeds prior to December 31, 2020.

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

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As part of our “one company” approach, we are in the process of converting to a single national warehouse management and procurement system to integrate our existing facilities, including acquired Supervalu facilities, onto one nationalized platform across the organization.

We continue to be focused on the automation of our new or expanded distribution centers that are at different stages of construction and implementation.

We continue to focus on the automation of our new or expanded distribution centers that are at different stages of construction and implementation.

These steps and others are intended to promote operational efficiencies and improve operating expenses as a percentage of net sales.

Goodwill Impairment Review

During the first quarter of fiscal 2019, the Company experienced a decline in its stock price and market capitalization.

During the second quarter of fiscal 2019, the stock price continued to decline, and the decline in the stock price and market capitalization became significant and sustained.

Due to this sustained decline in stock price, the Company determined that it was more likely than not that the carrying value of the Supervalu Wholesale reporting unit exceeded its fair value and performed an interim quantitative impairment test of goodwill.

The Company estimated the fair values of all reporting units using both the market approach, applying a multiple of earnings based on guidelines for publicly traded companies, and the income approach, discounting projected future cash flows based on management’s expectations of the current and future operating environment for each reporting unit.

The calculation of the impairment charge includes substantial fact-based determinations and estimates including weighted average cost of capital, future revenue, profitability, cash flows and fair values of assets and liabilities.

The rates used to discount projected future cash flows under the income approach reflect a weighted average cost of capital of 10% , which considered guidelines for publicly traded companies, capital structure and risk premiums, including those reflected in the Company’s then-current market capitalization.

The Company corroborated the reasonableness of the estimated reporting unit fair values by reconciling those fair values to its enterprise value and market capitalization.

Based on this analysis, the Company determined that the carrying value of its Supervalu Wholesale reporting unit exceeded its fair value by an amount that exceeded the assigned goodwill as of the acquisition date.

As a result, the Company recorded a goodwill impairment charge of $292.8 million in fiscal 2019, which reflects the preliminary goodwill impairment charge recorded in the second quarter of fiscal 2019 and adjustments to the charge recorded in the third and fourth quarters of fiscal 2019.

The goodwill impairment charge adjustments recorded in the third and fourth quarters of fiscal 2019 were attributable to changes in the preliminary fair value of net assets, most notably changes in tax assets and liabilities, intangible assets and property and equipment, which affected the initial goodwill resulting from the Supervalu acquisition.

During the first quarter of fiscal 2020, we changed our management structure and internal financial reporting, which resulted in the requirement to combine the Supervalu Wholesale reporting unit and the legacy Company Wholesale reporting unit into one U.S.

Wholesale reporting unit, and experienced a further sustained decline in market capitalization and enterprise value.

As a result of the change in reporting units and the sustained decline in market capitalization and enterprise value, we performed an interim quantitative impairment review of goodwill for the Wholesale reporting unit, which included a determination of the fair value of all reporting units.

Based on this analysis, we determined that the carrying value of our U.S.

Wholesale reporting unit exceeded its fair value by an amount that exceeded its assigned goodwill.

As a result, we recorded a goodwill impairment charge of $421.5 million in the first quarter of fiscal 2020.

The goodwill impairment charge is reflected in Goodwill and asset impairment charges in the Consolidated Statements of Operations.

The goodwill impairment charge reflects all of Supervalu Wholesale’s reporting unit goodwill, based on preliminary acquisition date assigned fair values.

The goodwill impairment charge recorded in fiscal 2019 is subject to change based upon the final purchase price allocation during the measurement period for estimated fair values of assets acquired and liabilities assumed from the Supervalu acquisition.

There can be no assurance that such final assessments will not result in material increases or decreases to the recorded goodwill impairment charge based upon the preliminary purchase price allocations, due to changes in the provisional opening balance sheet estimates of goodwill.

The Company’s estimates and assumptions are subject to change during the measurement period (up to one year from the acquisition date).

Refer to Note 4—Acquisitions in Part II, Item 8 of this Annual Report on Form 10-K for further information about the preliminary purchase price allocation and provisional goodwill estimated as of the acquisition date.

The estimated fair value of the Supervalu Wholesale reporting unit was below its estimated carrying value by approximately 20% .

The goodwill impairment review indicated that the estimated fair value of the legacy Company Wholesale and Canada Wholesale reporting units were in excess of their carrying values by over 20% .

Other continuing operations reporting units were substantially in excess of their carrying value.

If the estimated fair value of the Company were to decrease further, or other circumstances were to arise that indicate the value of one of these other reporting units have decreased, the Company may incur additional impairment charges for other reporting units based on additional impairment reviews.

The Company’s goodwill impairment review included a reconciliation of all of the reporting units’ fair value of to the Company’s market capitalization and enterprise value.

If the Company were to determine that a change in the composition of its goodwill reporting units was necessary in fiscal 2020, or in the future as a result of the change in the structure of management and financial reporting, the Company would perform a reallocation of goodwill based on the relative fair values to its new reporting units.

If this were to occur, the Company would consider whether an impairment exists based on the composition and measurement of the new reporting units’ fair values, which may result in additional goodwill impairment charges based on a number of factors, including the relative fair value allocation at the time that a change could occur, the fair value of the individual reporting units at that time, and the fair value of the Company at the time of the change in the composition of the goodwill reporting units.

The goodwill impairment charge reflects the impairment of all of the U.S.

Wholesale’s reporting unit goodwill.

Quantitatively, the goodwill impairment was driven by the incorporation of the value associated with the legacy Supervalu wholesale reporting unit that was combined into the legacy Company Wholesale goodwill reporting unit and a decrease in estimated long-range cash flows prepared as part of the quantitative assessment.

The goodwill impairment review indicated that the estimated fair value of the Canada Wholesale reporting unit, which had goodwill of $9.9 million as of November 2, 2019, exceeded its carrying values by approximately 13%.

Other continuing operations reporting units, which had goodwill of $9.9 million as of November 2, 2019, were substantially in excess of their carrying value.

If circumstances indicate that the value of one of these other reporting units has decreased, we may be required to perform additional reviews of goodwill and incur additional impairment charges.

The first quarter of fiscal 2020 quantitative goodwill impairment review included a reconciliation of all of the reporting units’ fair value to our market capitalization and enterprise value.

Refer Note 7—Goodwill and Intangible Assets in Part II, Item 8 of this Annual Report on Form 10-K for additional information regarding our goodwill impairment charges.

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 plan to minimize liabilities and stranded costs associated with these divestitures.

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

The Retail segment excludes retail banners and stores previously sold or closed.

We reviewed our reportable segments and determined we were required to report Retail as a separate segment.

As a result, we revised our Consolidated Financial Statements to reclassify Retail from discontinued operations to continuing operations.

This change in financial statement presentation resulted in the inclusion of Retail’s results of operations, financial position, cash flows and related disclosures within continuing operations.

Prior periods presented in the Consolidated Financial Statements have been conformed to the current period presentation, resulting in Retail being presented in continuing operations for all periods.

The revision of our Consolidated Statements of Operations to present Retail within continuing operations resulted in an increase in our consolidated net sales, gross profit and operating expenses, and an increase in consolidated gross profit as a percentage of net sales, which was partially offset by an increase in operating expenses as a percent of net sales.

In order to present Retail’s results of operations within continuing operations, Wholesale sales to Retail have been eliminated upon consolidation.

The Wholesale segment’s net sales to discontinued operations retail stores are eliminated within the Wholesale segment.

In the fourth quarter of fiscal 2020, we recorded a $50.0 million non-cash charge to decrease 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.

This charge reflects the depreciation and amortization from the date of the Supervalu acquisition date through fiscal 2020 based on useful lives assigned to the underlying Retail assets that were brought back into continuing operations.

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

We expect to obtain ongoing supply relationships with the purchasers of some of these retail operations, but we anticipate some reductions in supply volume will result from the divestiture of certain of these retail operations.

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These costs and charges, which may be material, include multiemployer plan charges, severance costs, store closure charges, and related costs.

A withdrawal from a multiemployer pension plan may result in a material obligation to make payments over an extended period of time.

A withdrawal from a multiemployer pension plan may result in an obligation to make material payments over an extended period of time.

The extent of these costs and charges will be determined based on outcomes achieved under the divestiture process.

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 fourth quarter of fiscal 2019 include Cub Foods and Shopper’s 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.

Our discontinued operations as of the end of fourth quarter of fiscal 2020 include five Shoppers stores, and for historical periods, results of discontinued operations include the Hornbacher’s and Shop ‘n Save and Shop ‘n Save East retail banners, which were divested in fiscal 2019, and Shoppers stores that were sold and closed in fiscal 2020.

In addition, cash flows from discontinued operations include real estate sales related to those 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 Consolidated Financial Statements for all periods presented.

The assets of these retail operations were recorded at what we believe to be their estimated fair value less costs to sell.

Prior to the Supervalu acquisition date, 19 St.

Louis-based Shop ‘n Save stores, 15 in-store pharmacies, one stand-alone pharmacy, four fuel centers and all remaining prescription files were sold to Schnuck Markets, Inc.

(“Schnucks”).

Schnucks agreed to assume the multi-employer pension obligations related to the Shop ‘n Save stores it acquired.

The sale of the stores was completed in the first quarter of fiscal 2019, and we closed the remaining Shop ‘n Save St.

Louis-based retail stores and the dedicated distribution center in the second quarter of fiscal 2019, and we continue to hold the owned real estate assets related to these locations for sale.

In addition, we entered into a supply agreement to serve as the primary supplier to nine Schnucks stores across northern Illinois, Iowa and Wisconsin.

In connection with the closure of the Shop ‘n Save locations and the acquisition of Supervalu, we assumed a $35.7 million multiemployer pension plan withdrawal liability, and recorded a closed stores’ reserve charge of approximately $17.1 million in the second quarter of fiscal 2019 based on the retail stores’ November cease-use date.

In fiscal 2019, the Company closed three of its eight Shop ‘n Save East stores and sold the remaining five Shop ‘n Save East stores to GIANT Food Store, LLC, and did not incur a gain or loss on the sale of this disposal group.

The Company closed the remaining Shop ‘n Save St.

Louis retail stores and the distribution center that were not sold prior to the Supervalu acquisition date.

In fiscal 2019, the Company completed the sale of seven of its eight Hornbacher's locations, as well as Hornbacher’s newest store currently under development in West Fargo, North Dakota, to Coborn's Inc.

(“Coborn’s”).

The Company did not incur a gain or loss on the sale of this disposal group.

The Hornbacher’s store in Grand Forks, North Dakota was not included in the sale to Coborn’s and has closed pursuant to the terms of the definitive agreement.

As part of the sale, Coborn's entered into a long-term agreement for the Company to serve as the primary supplier of the Hornbacher's locations and expand its existing supply arrangements for other Coborn’s locations.

In the fourth quarter of fiscal 2019, the Company completed the sale of the pharmacy prescription files and inventory of the Shoppers disposal group.

As of August 3, 2019, only the Cub Foods and Shoppers disposal groups continue to be classified as operations held for sale as discontinued operations.

We disposed of our retail business, Earth Origins Market (“Earth Origins”), during fiscal 2018.

Supervalu Professional Services Agreements

As of the Supervalu acquisition date, retail assets and liabilities were recorded at their estimated fair value less cost to sell, and subsequent to that date, we reviewed the fair value, less cost to sell, of 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 fiscal 2020, within discontinued operations the Company incurred approximately $31.1 million in pre-tax aggregate costs and charges related to Shoppers stores that remain within discontinued operations, consisting of $24.6 million of operating losses, severance costs and transaction costs during the period of wind-down and $6.5 million of property and equipment impairment charges related to impairment reviews.

In the second and third quarters 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.

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

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.

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.

The initial annual base charge under the Services Agreement is $30 million , subject to adjustments.

Total sales earned under the Services Agreement in fiscal 2020 was $24 million , which was recorded within Net sales.

We expect that services provided under the Services Agreement will wind down on or near the end of the initial term.

At that time, we would lose the revenue associated with this agreement, and if we are not able to eliminate fixed or variable costs associated with servicing this agreement concurrent with the decline in revenue, we would incur a decrease in operating profit.

Impact of Inflation or Deflation

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

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 fiscal 2020 and 2019.

In aggregate across all of our legacy businesses, excluding Supervalu, and taking into account the mix of products, management estimates our businesses experienced cost inflation of approximately one percent in fiscal 2019.

In the aggregate across all of our legacy businesses and taking into account the mix of products, management estimates our businesses experienced cost inflation of approximately one percent in fiscal 2020.

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

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Absent any changes in units sold or the mix of units sold, deflation has the effect of decreasing sales.

Inflation also impacts our measurement of the last-in, first-out (“LIFO”) inventory charge.

Other Factors Affecting our Business

We are also impacted by macroeconomic and demographic trends, and changes in the food distribution market structure.

however, consumer spending in the food-away-from-home industry has increased steadily as a percentage of total food expenditures.

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

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

Under the last-in, first out (“LIFO”) method of inventory accounting, product cost increases are recognized within Cost of sales based on expected year-end inventory quantities and costs, which has the effect of decreasing Gross profit and the carrying value of inventory.

Business Performance Assessment and Composition of 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.

Cost of sales and Gross profit

The principal components of our cost of sales include the amounts paid to suppliers for product sold, plus the cost of transportation necessary to bring the product to, or move product between, our various distribution centers, offset by consideration received from suppliers in connection with the purchase or promotion of the suppliers’ products.

Cost of sales also includes amounts incurred by us at our manufacturing subsidiary, Woodstock Farms Manufacturing, for inbound transportation costs offset by consideration received from suppliers in connection with the purchase or promotion of the suppliers’ products.

The principal components of our cost of sales include the amounts paid to suppliers for product sold, plus the cost of transportation necessary to bring the product to, or move product between, our various distribution centers, partially offset by consideration received from suppliers in connection with the purchase or promotion of the suppliers’ products.

Cost of sales also includes amounts incurred by us at our manufacturing subsidiary, Woodstock Farms Manufacturing, for inbound transportation costs.

Our gross margin may not be comparable to other similar companies within our industry that may include all costs related to their distribution network in their costs of sales rather than as operating expenses.

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Restructuring, acquisition and integration expenses

Restructuring, acquisition and integration expenses reflect expenses resulting from restructuring activities, including severance costs, change-in-control related charges, stock-based compensation acceleration charges, store closure charges, and acquisition and integration expenses.

For fiscal 2019, these expenses are primarily a result of the Supervalu acquisition.

Fiscal 2018 primarily reflects Supervalu acquisition costs and Earth Origins exit and disposal costs.

Other expenses

Other expense (income), net includes interest on outstanding indebtedness, including direct financing and capital lease obligations, net periodic benefit plan income, excluding service costs, interest income and miscellaneous income and expenses.

Restructuring, acquisition and integration expenses reflect expenses resulting from restructuring activities, including severance costs, change-in-control related charges, facility closure asset impairment charges and costs, stock-based compensation acceleration charges and acquisition and integration expenses.

Integration expenses include incremental expenses related to combining facilities required to optimize our distribution network as a result of acquisitions.

Interest expense, net

Interest expense, net includes primarily interest expense on long-term debt, net of capitalized interest, interest expense on finance and direct finance lease obligations, and amortization of financing costs and discounts.

Net periodic benefit income, excluding service cost

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

Adjusted EBITDA

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Adjusted EBITDA is provided as a supplement to our results of operations and related analysis, and should not be considered superior to, a substitute for or an alternative to any financial measure of performance prepared and presented in accordance with GAAP.

Adjusted EBITDA excludes certain items because they are non-cash items or are items that are not considered in our supplemental assessment of on-going business performance.

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

Adjusted EBITDA excludes certain items because they are non-cash items or are items that do not reflect management’s assessment of on-going business performance.

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 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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Adjusted EBITDA should be reviewed in conjunction with our results reported in accordance with GAAP in this Annual Report.

There are significant limitations to using Adjusted EBITDA as a financial measure including, but not limited to, it not reflecting the cost of cash expenditures for capital assets or certain other contractual commitments, capital lease obligation and debt service expenses, income taxes, and any impacts from changes in working capital.

We define Adjusted EBITDA as a consolidated measure inclusive of continuing and discontinued operations results, which we reconcile by adding Net (loss) income from continuing operations, plus Total other expense, net and (Benefit) provision for income taxes , plus Depreciation and amortization calculated in accordance with GAAP, plus non-GAAP adjustments for Share-based compensation , Restructuring, acquisition and integration related expenses, goodwill and asset impairment charges, certain legal charges and gains, certain other non-cash charges or items, as determined by management, plus Adjusted EBITDA of discontinued calculated in manner consistent with the results of continuing operations outlined above.

There are significant limitations to using Adjusted EBITDA as a financial measure including, but not limited to, it not reflecting the cost of cash expenditures for capital assets or certain other contractual commitments, finance lease obligation and debt service expenses, income taxes, and any impacts from changes in working capital.

We define Adjusted EBITDA as a consolidated measure inclusive of continuing and discontinued operations results, which we reconcile by adding Net (loss) income from continuing operations, plus Total other expense, net and (Benefit) provision for income taxes , plus Depreciation and amortization calculated in accordance with GAAP, plus non-GAAP adjustments for Share-based compensation , Restructuring, acquisition and integration related expenses , Goodwill and asset impairment charges , Loss (gain) on sale of assets , certain legal charges and gains, certain other non-cash charges or items, as determined by management, plus Adjusted EBITDA of discontinued operations calculated in manner consistent with the results of continuing operations, outlined above.

Assessment of Our Business Results

The following table sets forth a summary of our results of operations and Adjusted EBITDA for the periods indicated.

We have revised the following table for the immaterial error correction discussed in Note 20—Immaterial Correction to Prior Period Financial Statements and the presentation of Retail within continuing operations discussed in Note 1—Significant Accounting Policies , both included within Part II, Item 8 of this Annual Report on Form 10-K.

(in thousands)

3 unchanged sentences

Restructuring, acquisition and integration related expenses

Loss (gain) on sale of assets

Operating (loss) income

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Net (loss) income from continuing operations

Income from discontinued operations, net of tax

(Loss) income from discontinued operations, net of tax

Net (loss) income including noncontrolling interests

Less net (income) loss attributable to noncontrolling interests

Less net income attributable to noncontrolling interests

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

Adjusted EBITDA

The following table reconciles Adjusted EBITDA to Net (loss) income 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.

(in thousands)

Net (loss) income from continuing operations

Adjustments to continuing operations net (loss) income:

Adjustments to continuing operations net income (loss):

Less net income attributable to noncontrolling interests

Total other expense, net

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Share-based compensation

Restructuring, acquisition and integration related expenses (1)

Goodwill and asset impairment charges (2)

Restructuring, acquisition, and integration related expenses (3)

Loss (gain) on sale of assets (4)

Notes receivable charges (5)

Inventory fair value adjustment (6)

Legal settlement income, net of reserve adjustment (4)

Legal reserve charge, net of settlement income (7)

Other retail expense (8)

Adjusted EBITDA of continuing operations

Adjusted EBITDA of discontinued operations (9)

Adjusted EBITDA

Income from discontinued operations, net of tax

Adjustments to discontinued operations net income:

Less net (income) loss attributable to noncontrolling interests

(Loss) income from discontinued operations, net of tax (9)

Adjustments to discontinued operations net (loss) income:

Total other expense, net

Provision for income taxes

Benefit for income taxes

Other expense

Share-based compensation

Restructuring, store closure and other charges, net (10)

Adjusted EBITDA of discontinued operations (9)

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

Refer to Note 5—Restructuring, Acquisition and Integration Related Expenses in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

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.

Fiscal 2020 primarily reflects a goodwill impairment charge attributable to a reorganization of our reporting units and a sustained decrease in market capitalization and enterprise value of the Company;

resulting in a decline in the estimated fair value of the U.S.

Wholesale reporting unit.

In addition, this charge includes a goodwill finalization charge attributable to the Supervalu acquisition and an asset impairment charge.

Fiscal 2019 reflects a goodwill impairment charge attributable to the Supervalu acquisition.

Fiscal 2018 reflects goodwill and asset impairment charges recorded related to the previously disposed Earth Origin’s Market retail business.

Refer to Note 7—Goodwill and Intangible Assets in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

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

Reflects income received to settle a legal proceeding and a charge related to our assessment of legal proceedings, which are more fully described in Note 18—Commitments, Contingencies and Off-Balance Sheet Arrangements in Part II, Item 8 of this Annual Report on Form 10-K.

Fiscal 2019 Adjusted EBITDA of discontinued operations excludes rent expense of $32.2 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, 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.

Amounts represent store closure charges and costs, and an inventory charges related to discontinued operations, net of the effect of fees received from credit card companies related to a settlement.

Fiscal 2020 primarily reflects Shoppers asset impairment charges, closed property and distribution center impairment charges and costs, and administrative fees associated with integration activities.

Fiscal 2019 primarily reflects expenses resulting from the acquisition of Supervalu and acquisition and integration expenses, including employee-related costs.

Refer to Note 5—Restructuring, Acquisition and Integration Related Expenses in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

Fiscal 2020 primarily reflects a $50.0 million accumulated depreciation and amortization charge related to the requirement to move Retail from discontinued operations to continuing operations, partially offset by $32.9 million of gains on the sale of distribution centers and other assets.

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 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.

Reflects expenses associated with event-specific damages to certain retail stores.

Income from discontinued operations, net of tax and Adjusted EBITDA of discontinued operations excludes rent expense of $5.8 million and $9.5 million in fiscal 2020 and 2019, 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 remain or expect to remain primarily obligated under these leases.

We expect to assign these leases with the obligation to pay this rent expense to buyers of our retail discontinued operations upon sale.

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 us and investors a meaningful measure of performance.

Amounts represent store closure charges and costs, operational wind-down and inventory charges, and asset impairment charges related to discontinued operations.

RESULTS OF OPERATIONS

Fiscal year ended August 3, 2019 (fiscal 2019) compared to fiscal year ended July 28, 2018 (fiscal 2018)

Within our results of operations we have estimated the impact of the additional week and the acquisition of Supervalu, where applicable and estimable, to provide more comparable financial results on a year-over-year basis.

The impact of the 53rd week discussed below represents an estimate of the contribution from the additional week in fiscal 2019 and is calculated by taking one-fifth of the respective metrics for the last five-week period, within the 14-week fourth quarter of fiscal 2019.

Our analysis within the Results of Operations section below of Net sales, Gross profit, Operating expenses and Operating (loss) income is presented on a consolidated basis, as our single reportable segment principally comprises the entire operations of our business.

Fiscal year ended August 1, 2020 (fiscal 2020) compared to fiscal year ended August 3, 2019 (fiscal 2019)

Within our results of operations we have estimated the impact of the additional week in fiscal 2019 and the acquisition of Supervalu, where applicable and estimable, to provide comparable financial results on a year-over-year basis.

The impact of the 53rd week in fiscal 2019 discussed below represents an estimate of the contribution from the additional week in fiscal 2019 and is calculated by taking one-fifth of the respective metrics for the last five-week period, within the 14-week fourth quarter of fiscal 2019.

The quantification of Supervalu’s impact on our results of operations presented below is to discuss the incremental impact of Supervalu, and provide analysis of our underlying business for year-over-year comparability purposes.

Our analysis of Net sales is presented on a customer channel basis inclusive of all segments.

References to legacy company results are presented to provide a comparative results analysis excluding the Supervalu acquired business impacts.

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Increase (Decrease)

Customer Type

Customer Channel

% of Total Net Sales

Independent retailers (1)

Total net sales

During the fourth quarter of fiscal 2020, the presentation of net sales by customer channel has been recast to be presented on a basis consistent with customer size.

International customers other than Canada, and alternative format sales continue to be classified within Other.

The main effect of the change was to re-categorize the former Supermarkets and Independents channels, previously classified by the majority of product carried by those customers between conventional and natural products, respectively, to classify those stores by the number of customer locations we supply.

There was no impact to the Consolidated Statements of Operations as a result of the reclassification of customer types.

We believe this new basis better reflects the nature and economic risks of cash flows from customers.

There was no change to the Supernatural channel.

Refer to Note 3—Revenue Recognition in Part II, Item 8 of this Annual Report on Form 10-K for our channel definitions.

Our net sales for fiscal 2020 increased approximately 19% from fiscal 2019 .

The increase in net sales for fiscal 2020 was driven by incremental Supervalu net sales from the first quarter of fiscal 2020, as Supervalu was only included in our results for approximately one week in the first quarter of fiscal 2019, of approximately $3,336 million and was partially offset by $475 million from an incremental 53rd week in fiscal 2019.

The remaining underlying net sales increased $1,346 million or 6.2% .

Chains net sales increased primarily due to $1,612 million of an incremental 12 weeks of net sales from the acquired Supervalu business, which was partially offset by the estimated impact from the 53rd week in fiscal 2019 of $192 million .

The remaining increase of $431 million was primarily due to growth in sales to existing customers, including 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 business prior to the pandemic.

Independent retailers net sales increased primarily due to $971 million of an incremental 12 weeks of net sales from the acquired Supervalu business, which was partially offset by the estimated impact from the 53rd week in fiscal 2019 , of $120 million .

The remaining increase of $312 million was primarily due to growth in sales to existing customers, including 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.

Supernatural net sales increased primarily due to increased sales related to the COVID-19 pandemic, growth in existing and new product categories, and increased sales to existing and new stores prior to the pandemic, partially offset by the impact of categories that have been adversely impacted by COVID such as bulk and ingredients used for prepared foods and the estimated impact from the 53rd week in fiscal 2019 of $84 million .

Retail’s net sales increased primarily due to $486 million of an incremental 12 weeks of net sales from the acquired Supervalu business, which was partially offset by the estimated impact from the 53rd week in fiscal 2019 of $40 million .

The remaining increase of $232 million was driven by increased identical store sales related to the COVID-19 pandemic.

Other net sales increased primarily due to $267 million of an incremental 12 weeks of net sales from the acquired Supervalu business, which was partially offset by the estimated impact from the 53rd week in fiscal 2019 of $39 million .

The remaining decrease of $39 million is primarily due to a 23% (or $104 million) decline in sales to foodservice customers, whose purchases slowed due to the COVID-19 pandemic based on their locations being temporarily closed.

We expect sales to our foodservice customers in the first half of fiscal 2021 to decrease as compared to fiscal 2020 as a result of the COVID-19 pandemic.

Cost of Sales and Gross Profit

Our gross profit increased $666.2 million or 20.8% , to $3,874.8 million in fiscal 2020 , from $3,208.6 million in fiscal 2019 .

Our gross profit as a percentage of net sales increased to 14.61% in fiscal 2020 compared to 14.38% in fiscal 2019 .

Our gross profit for fiscal 2020 included an incremental 12 weeks of gross profit from the acquired Supervalu business estimated as approximately $480.2 million and fiscal 2019 included an estimated increase in gross profit from the 53rd week of $68.9 million .

The remaining increase in gross profit of $254.9 million was primarily driven by higher Wholesale and Retail sales volume.

The 23 basis point increase in gross profit rate was driven by a 92 basis point increase in Retail gross profit as a percent of its net sales, which was driven by lower promotional activity and contributed to a segment business mix impact that increased overall gross profit rate.

This increase was partially offset by a 12 basis point decrease in Wholesale gross profit as a percent of its net sales, and included a decrease due to lower gross profit rates on conventional products.

Operating Expenses

Operating expenses increased $573.6 million , or 19.3% , to $3,541.5 million , or 13.36% of net sales, in fiscal 2020 compared to $2,967.9 million , or 13.30% of net sales, in fiscal 2019 .

The increase in operating expenses as a percent of net sales was driven by 25 basis points of higher incentive compensation, including temporary COVID-19 compensation expense and 13 basis points of higher bad debt expense primarily from customer bankruptcies prior to the pandemic, which were partially offset by 31 basis points of lower other employee costs driven by lower salaries and benefits expenses.

Operating expenses decreased by $64.7 million from the impact of the additional 53rd week in fiscal 2019.

Goodwill and Asset Impairment Charges

During fiscal 2020 we recorded $425.4 million of goodwill and asset impairment charges, which reflects $421.5 million from an impairment charge on the remaining goodwill attributable to the U.S.

Wholesale reporting unit, $2.5 million related to purchase accounting adjustments to finalize the opening balance sheet goodwill and $1.4 million of other asset impairment charges.

Refer to the section above Executive Overview— Goodwill Impairment Review and Note 7—Goodwill and Intangible Assets in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

During fiscal 2019 we recorded a $292.8 million goodwill impairment charge, which reflects the preliminary goodwill impairment based on the preliminary fair value of net assets assigned, which was finalized in the first quarter of fiscal 2020.

The goodwill impairment charge recorded in fiscal 2019 was subject to further change based upon the final purchase price allocation during the measurement period for estimated fair values of assets acquired and liabilities assumed from the Supervalu acquisition.

The estimates and assumptions were subject to change during the measurement period (up to one year from the acquisition date).

Restructuring, Acquisition and Integration Related Expenses

Restructuring, acquisition and integration related expenses were $86.4 million for fiscal 2020 and primarily included $41.6 million of integration related costs, $39.9 million of closed property reserve charges related to the divestiture of retail banners and $4.9 million of primarily employee related separation costs.

Expenses incurred in fiscal 2019 primarily related to $74.4 million of employee related costs and charges due to severance, settlement of outstanding equity awards and benefits costs, $51.2 million of other acquisition and integration related costs and $22.5 million of closed property reserve charges primarily related to the divestiture of retail banners.

We expect to incur additional distribution center integration costs throughout fiscal 2021 related to our operational restructuring to achieve cost synergies and supply chain efficiencies within continuing operations.

Loss (Gain) on Sale of Assets

Loss on sale of assets increased $17.6 million to $17.1 million in fiscal 2020 from a gain on sale of assets of $0.5 million in fiscal 2019.

Loss on sale of assets in fiscal 2020 included an accumulated depreciation and amortization charge of $50.0 million related to the requirement to move Retail from discontinued operations to continuing operations, which was partially offset by gains on sales of distribution centers and a retail accounting services business.

Operating Loss

Reflecting the factors described above, operating loss decreased $4.2 million to an operating loss of $195.6 million for fiscal 2020 , from an operating loss of $199.8 million for fiscal 2019 .

The decrease in operating loss was driven by gross profit increases in excess of operating expense increases, lower restructuring, acquisition and integration related expenses, partially offset by a higher goodwill impairment charge and a higher loss on sale of assets.

The fiscal 2020 and 2019 operating loss es include $5.8 million and $9.5 million , respectively, of operating lease rent expense and $1.9 million and $4.2 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.

Total Other Expense, Net

(in thousands)

Increase (Decrease)

Net periodic benefit income, excluding service cost

Interest expense on long-term debt, net of capitalized interest

Interest expense on finance and direct financing lease obligations

Amortization of financing costs and discounts

Debt refinancing costs and unamortized financing charges

Interest income

Interest expense, net

Total other expense, net

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

Net periodic benefit income for fiscal 2020 includes $11.3 million of non-cash pension settlement charges primarily from the lump sum pension settlement offering completed in fiscal 2020 .

Fiscal 2019 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 increase in interest expense on long-term debt for fiscal 2020 compared to fiscal 2019 was primarily due to an increase in average outstanding debt driven by the Supervalu acquisition financing executed near the end of the first quarter of fiscal 2019.

Interest on finance and direct financing leases decreased primarily due to the adoption of the new lease accounting standard, ASC 842, in fiscal 2020.

Beginning in the third quarter of fiscal 2020, interest on financing leases includes interest expense 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 26.3% and 17.1% on pre-tax losses for fiscal 2020 and 2019 , respectively.

The increase in the benefit rate for fiscal 2020 was primarily driven by the NOL carryback provisions of the CARES Act.

(Loss) Income from Discontinued Operations, Net of Tax

The results of discontinued operations for fiscal 2020 reflect net sales of $228.5 million for which we recognized $66.4 million of gross profit and a loss from discontinued operations, net of tax of $15.2 million .

As noted above, pre-tax loss from discontinued operations excludes $5.8 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 $33.5 million of restructuring expenses primarily related to Shoppers store closures expenses related to employee costs and wind-down expenses, and asset impairment charges.

In addition, gross profit of discontinued operations included inventory charges from store closures.

As of the end of fiscal 2020, discontinued operations consisted of only five Shoppers stores.

Net sales, gross profit and operating expenses of discontinued operations decreased $211.9 million , $61.8 million and $53.4 million , respectively, for the fiscal 2020 as compared to fiscal 2019 primarily due to closed and sold Shoppers stores, results from the Hornbacher’s retail banner, which was sold in December 2019, and the closed Shop ‘n Save East stores, which were partially offset by the partial year in 2019 due to the timing of the Supervalu acquisition.

Refer to the section above Executive Overview— Divestiture of Retail Operations and to Note 19—Discontinued Operations in Part II, Item 8 of this Annual Report on Form 10-K for additional 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 $274.1 million , or $5.10 per diluted common share, for fiscal 2020 , compared to $284.7 million , or $5.56 per diluted common share, for fiscal 2019 .

As described in more detail within Note 13—Share-Based Awards in Part II, Item 8 of this Annual Report on Form 10-K , in fiscal 2020 and 2019 we issued approximately 1.3 million and 2.0 million shares of common stock, respectively, to fund the settlement of time-vesting replacement award obligations from the Supervalu acquisition.

We have approximately 1.6 million additional shares authorized for issuance and registered on a Registration Statement on Form S-8 filed with the SEC for the issuance in order to satisfy replacement award and option issuance obligations.

Fiscal year ended August 3, 2019 (fiscal 2019) compared to fiscal year ended July 28, 2018 (fiscal 2018)

The requirement to move Retail to continuing operations in fiscal 2020, resulted in a requirement to revise historical financial information to conform with current period presentation, and as a result the following reflects an updated results of operations discussion for fiscal 2019 compared to fiscal 2018.

Our net sales by customer channel were as follows (in millions):

Increase (Decrease)

Customer Channel

% Total Net Sales

During fiscal 2019, the presentation of net sales by customer channel was adjusted to reflect changes in the classification of customer types as a result of a detailed review of customer channel definitions.

There was no impact to the Consolidated Statements of Operations as a result of revising the classification of customer types.

As a result of this adjustment, net sales to our supermarkets channel and to our other channel for fiscal 2018 decreased approximately $36 million and $58 million , respectively, compared to the previously reported amounts, while net sales to the independents channel for fiscal 2018 increased approximately $95 million compared to the previously reported amounts.

Our net sales for fiscal 2019 increased approximately $11.16 billion , or 109% , to $21.39 billion , from $10.23 billion for fiscal 2018.

The increase in fiscal 2019 net sales was driven by Supervalu net sales of approximately $10.47 billion , which included $247.9 million from the 53rd week in fiscal 2019, the increase in net sales of our supernatural channel, the remaining company estimated impact from the 53rd week of approximately $203.4 million and an increase in independents channel net sales, which were partially offset by decreases in other and supermarket sales.

Net sales to our supermarkets channel increased by approximately $9,685 million , or 343% , in fiscal 2019 compared to fiscal 2018, and represented approximately 58% and 28% of total net sales for fiscal 2019 and 2018, respectively.

The increase in supermarkets net sales is primarily due to $9,655 million of net sales from the acquired Supervalu business and the estimated impact from the 53rd week in fiscal 2019 of $53 million , with the remaining decrease of $23 million primarily due to net sales decreases to existing customers and lost customers.

Whole Foods Market is our only supernatural customer, and net sales to Whole Foods Market for fiscal 2019 increased by approximately $635 million , or 17% , in fiscal 2019 as compared to fiscal 2018, and accounted for approximately 21% and 37% of our total net sales for fiscal 2019 and 2018, respectively.

The increase in net sales to Whole Foods Market is primarily due to an increase in same store sales, which have continued following its acquisition by Amazon.com, Inc.

in August 2017, coupled with growth in new product categories, most notably the health, beauty and supplement categories, the estimated impact from the 53rd week in fiscal 2019 of $84 million , and increased sales from new stores.

Net sales to our independents channel increased by approximately $511 million , or 19% , in fiscal 2019 compared to fiscal 2018, and accounted for 15% and 26% of our total net sales for fiscal 2019 and 2018, respectively.

The increase in independents net sales is primarily due to $391 million of net sales from the acquired Supervalu business and the estimated impact from the 53rd week in fiscal 2019 of $50 million , with the remaining increase of $70 million primarily due to sales growth to existing customers.

Net sales to our other channel increased by approximately $329 million , or 34% , in fiscal 2019 compared to fiscal 2018, and accounted for approximately 6% and 9% of total net sales for fiscal 2019 and 2018, respectively.

The increase in other net sales is primarily due to $429 million of net sales from the acquired Supervalu business and the estimated impact from the 53rd week in fiscal 2019 of $16 million , partially offset by $116 million due to sales declines driven by our e-commerce business and lack of sales from our retail business, Earth Origins, which was disposed in the fourth quarter of fiscal 2018.

Independent retailers (1)

Total net sales

Refer to Note 3—Revenue Recognition in Part II, Item 8 of this Annual Report on Form 10-K for our channel definitions.

Our net sales for fiscal 2019 increased 118% to $22.31 billion from $10.23 billion for fiscal 2018 .

The increase in net sales for fiscal 2019 was driven by Supervalu net sales of approximately $11.40 billion , which included $272 million from the 53rd week in fiscal 2019, the increase in net sales of our Supernatural channel, the remaining company estimated impact from the 53rd week of approximately $204 million and an increase in Chains net sales, which were partially offset by decreases in Other and Independent retailers net sales.

Chains net sales increased primarily due to $5,392 million of net sales from the acquired Supervalu business, including the 53rd week, and the estimated impact from the 53rd week in fiscal 2019 on the remaining company of $62 million .

The remaining increase of $59 million is primarily due to net sales to existing customers.

Independent retailers net sales increased primarily due to $3,402 million of net sales from the acquired Supervalu business, including the 53rd week, and the estimated impact from the 53rd week in fiscal 2019 on the remaining company of $40 million .

The remaining decrease was $6 million .

Supernatural net sales increased , which included an estimated impact from the 53rd week of $84 million .

The remaining increase in net sales to Whole Foods Market was primarily due to an increase in same store sales, which have continued following its acquisition by Amazon.com, Inc.

in August 2017, coupled with growth in new product categories, most notably the health, beauty and supplement categories, and increased sales from new stores.

Retail’s net sales increased solely due to $1,653 million of net sales from the acquired Supervalu business.

Other net sales increased primarily due to $947 million of net sales from the acquired Supervalu business, including the 53rd week, and the estimated impact from the 53rd week on the remaining company in fiscal 2019 of $18 million .

The remaining decrease of $123 million is primarily due t o sales declines driven by our e-commerce business and lack of sales from Earth Origins, which was disposed in the fourth quarter of fiscal 2018.

Cost of Sales and Gross Profit

Our gross profit increased $1,688.6 million , or 111.1% , to $3,208.6 million in fiscal 2019 , from $1,520.0 million in fiscal 2018 .

Our gross profit as a percentage of net sales decreased to 13.02% in fiscal 2019 compared to 14.89% in fiscal 2018.

Our gross profit as a percentage of net sales was 14.38% in fiscal 2019 compared to 14.86% in fiscal 2018 .

Our gross profit for fiscal 2019 included 41 weeks of gross profit from the acquired Supervalu business of approximately $1,639.9 million , net of its related LIFO inventory charge, and an estimated increase in gross profit from the 53rd week of $28.0 million on the legacy company results.

In addition, our legacy company Wholesale business gross profit decreased from a LIFO charge of $15.0 million in fiscal 2019, and from cycling the fiscal 2018 gross profit from a change in accounting estimate benefit of $20.9 million .

The remaining increase in gross profit of $63.9 million , which reflects a gross profit decrease of approximately 10 basis points,

was driven by the faster growth of the supernatural channel relative to the other customer channels, offset in part by lower inbound freight expense.

The remaining increase in gross profit of $56.6 million was driven by the sales growth from the Supernatural channel relative to the other customer channels and lower inbound freight expense.

The decrease in gross profit rate was primarily due to the impact of the acquired Supervalu business.

Total Gross profit increased by $68.9 million from the impact of the additional 53rd week.

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Operating expenses increased $1,693.4 million , or 132.9% , to $2,967.9 million , or 13.30% of net sales, in fiscal 2019 compared to $1,274.6 million , or 12.46% of net sales, in fiscal 2018 .

The decrease in operating expenses as a percent of net sales was driven by the mix impact from the acquired Supervalu business, lower employee costs, including the impact of cost synergies and lower incentive compensation costs, partially offset by higher depreciation and amortization expense of approximately 30 basis points.

The increase in operating expenses as a percentage of net sales was primarily driven by the mix impact from the acquired Supervalu business, including higher Retail costs including employee and occupancy costs, and the impact of higher depreciation and amortization expense of 25 basis points on total company results, partially offset by lower administrative employee costs, including the impact of cost synergies and lower incentive compensation costs, excluding stock-based compensation.

Operating expenses increased by $64.7 million from the impact of the additional 53rd week in fiscal 2019.

Goodwill and Asset Impairment Charges

During fiscal 2019 we recorded a $292.8 million goodwill impairment charge, which reflects the preliminary goodwill impairment charge of $292.8 million based on the preliminary fair value of net assets assigned.

The goodwill impairment charge recorded in fiscal 2019 is subject to further change based upon the final purchase price allocation during the measurement period for estimated fair values of assets acquired and liabilities assumed from the Supervalu acquisition.

The estimates and assumptions are subject to change during the measurement period (up to one year from the acquisition date).

During fiscal 2019 we recorded a $292.8 million goodwill impairment charge, which reflects the preliminary goodwill impairment charge based on the preliminary fair value of net assets assigned.

The estimates and assumptions were subject to change during the measurement period (up to one year from the acquisition date).

During fiscal 2018, the Company made the decision to close three non-core, under-performing stores of its total of twelve Earth Origins stores.

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Expenses incurred in fiscal 2018 primarily related to $5.0 million of acquisition related costs associated with the Supervalu acquisition and $4.8 million charges related to the exit of our Earth Origins Market business.

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.

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

Operating (Loss) Income

Reflecting the factors described above, operating income decreased $518.2 million to an operating loss of $291.0 million for fiscal 2019, from operating income of $227.2 million for fiscal 2018.

Reflecting the factors described above, operating income decreased approximately $424.2 million to an operating loss of $199.8 million for fiscal 2019 , from operating income of $224.5 million for fiscal 2018 .

As a percentage of net sales, operating loss was 0.90% for fiscal 2019 , compared to operating income of 2.19% for fiscal 2018 .

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Interest expense on long-term debt, net of capitalized interest

Interest expense on capital and direct financing lease obligations

Interest expense on finance and direct financing lease obligations

Amortization of financing costs and discounts

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The increase in interest on capital 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.

We expect interest expense to increase in future periods as compared to periods prior to the Supervalu acquisition due to the increased indebtedness incurred to finance the acquisition of Supervalu.

As a result of the Supervalu acquisition, we assumed defined benefit pension and other postretirement benefit obligations.

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The results of operations for fiscal 2019 reflect net sales of $440.5 million for which we recognized $128.3 million of gross profit and Income from discontinued operations, net of tax of $0.9 million .

As noted above, pre-tax income from discontinued operations excludes $32.2 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.

As noted above, pre-tax income from discontinued operations excludes 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.

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In addition, gross profit of discontinued operations included inventory charges from store closures.

Refer to the section above Executive Overview— Divestiture of Retail Operations and to Note 19—Discontinued Operations in Part II, Item 8 of this Annual Report on Form 10-K for additional financial information regarding these discontinued operations.

Net (Loss) Income 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 $285.0 million ( $5.56 per diluted common share) for fiscal 2019, compared to net income of $165.7 million , or $3.26 per diluted common share, for fiscal 2018.

As described in more detail in Note 1—Significant Accounting Policies in Part II, Item 8 of this Annual Report on Form 10-K, during fiscal 2018 we experienced an increased volume in our accrual for inventory purchases as a result of increasing volumes of inventory purchases and work flow changes to our practices resulting from the establishment of a centralized processing function for supplier payables.

In the third quarter of fiscal 2018, we changed our estimate for the accrual for inventory purchases as a result of our review of the criteria for determining amounts where a liability is no longer considered probable as well as a review of historical data and data relating to fiscal 2018 purchases of inventory.

As a result of this change in estimate, accounts payable was reduced by $20.9 million , resulting in an increase to net income of $13.9 million , or $0.27 per diluted share, for fiscal 2018.

Absent the change in accounting estimate, we would have expected to recognize the benefit to operating income of the change in estimate within the following four quarters, as the accrual would be expected to be reduced in accordance with our prior estimate methodology.

As described in more detail within Note 13—Share-Based Awards , in fiscal 2019 we issued approximately 2.0 million shares of common stock to fund the settlement of time-vesting replacement award obligations from the Supervalu acquisition.

We have approximately 3.0 million additional shares authorized for issuance and registered on a Registration Statement on Form S-8 filed 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.

Fiscal year ended July 28, 2018 (fiscal 2018) compared to fiscal year ended July 29, 2017 (fiscal 2017)

Our net sales for the fiscal year ended July 28, 2018 increased approximately 10.3% , or $952.2 million , to $10.23 billion from $9.27 billion for the fiscal year ended July 29, 2017 .

Our net sales by customer type for the fiscal years ended July 28, 2018 and July 29, 2017 were as follows (in millions):

of $284.7 million , or $5.56 per diluted share, for fiscal 2019 , compared to net income of $162.8 million , or $3.20 per diluted share, for fiscal 2018 .

Segment Results of Operations

In evaluating financial performance in each business segment, management primarily uses, Net sales and Adjusted EBITDA of its business segments as discussed and reconciled within Note 17—Business Segments within Part II, Item 8 of this Annual Report on Form 10-K and the above table within the Executive Overview section.

The following tables set forth Net sales and Adjusted EBITDA by segment for the periods indicated.

Increase / (Decrease)

Customer Type

(52 weeks) (1)

% Total Net Sales

(in thousands)

Total Net sales

During the second quarter of fiscal 2019, the presentation of net sales by customer channel was adjusted to reflect changes in the classification of customer types as a result of a detailed review of customer channel definitions.

There was no impact to the Consolidated Statements of Operations as a result of revising the classification of customer types.

In addition, net sales to our supermarkets channel and to our other channel for fiscal 2017 decreased approximately $16 million and $47 million , respectively, compared to the previously reported amounts, while net sales to the independents channel for fiscal 2017 increased approximately $63 million compared to the previously reported amounts.

Whole Foods Market is our only supernatural customer, and net sales to Whole Foods Market for the fiscal year ended July 28, 2018 increased by approximately $662 million or 21.4% over the prior year and accounted for approximately 37% and 33% of our total net sales for the fiscal years ended July 28, 2018 and July 29, 2017 , respectively.

The increase in net sales to Whole Foods Market was primarily due to an increase in same store sales following its acquisition by Amazon.com, Inc.

in August 2017 coupled with growth in new product categories, most notably the health, beauty and supplement categories.

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 channel.

Net sales to our supermarkets channel for the fiscal year ended July 28, 2018 increased by approximately $89 million , or 3.3% from fiscal 2017 and represented approximately 28% and 30% of total net sales in fiscal 2018 and fiscal 2017 , respectively.

The increase in net sales to supermarkets was primarily driven by growth in our wholesale division, which includes our broadline distribution business.

Net sales to our independents channel increased by approximately $178 million , or 7.1% during the fiscal year ended July 28, 2018 compared to the fiscal year ended July 29, 2017 , and accounted for 26% and 27% of our total net sales in fiscal 2018 and

fiscal 2017 , respectively.

The increase in net sales in this channel was primarily due to growth in our wholesale division, which includes our broadline distribution business.

Other net sales, which included sales to foodservice customers and sales from the United States to other countries, as well as sales through our e-commerce business, branded product lines, retail division, manufacturing division, and our brokerage business, increased by approximately $24 million or 2.5% for the fiscal year ended July 28, 2018 over the prior fiscal year and accounted for approximately 9% and 10% of total net sales in fiscal 2018 and fiscal 2017 , respectively.

The increase in other net sales was primarily driven by growth in our e-commerce business.

Cost of Sales and Gross Profit

Our gross profit increased approximately 6.6% , or $93.8 million , to $1.52 billion for the fiscal year ended July 28, 2018 , from $1.43 billion for the fiscal year ended July 29, 2017 .

Our gross profit as a percentage of net sales was 14.9% for the fiscal year ended July 28, 2018 and 15.4% for the fiscal year ended July 29, 2017 .

The decrease in gross profit as a percentage of net sales was primarily driven by a shift in customer mix where net sales growth of our largest customer outpaced growth of other customers with higher margin and by an increase in inbound freight costs.

Operating Expenses

Our total operating expenses increased approximately 7.7% , or $92.6 million , to $1.30 billion for the fiscal year ended July 28, 2018 , from $1.20 billion for the fiscal year ended July 29, 2017 .

As a percentage of net sales, total operating expenses decreased to approximately 12.7% for the fiscal year ended July 28, 2018 , from approximately 13.0% for the fiscal year ended July 29, 2017 .

The decrease in operating expenses as a percentage of net sales was primarily driven by leveraging of fixed costs on increased net sales.

This was partially offset by increased costs incurred to fulfill the increased demand for our products.

Total operating expenses also included share-based compensation expense of $25.8 million and $25.7 million for fiscal 2018 and 2017, respectively.

For more information, refer to Note 13—Share-Based Awards to our Consolidated Financial Statements included in “Item 8.

Financial Statements and Supplementary Data” of this Annual Report.

Goodwill and Asset Impairment Charges

Fiscal 2018 goodwill and asset impairment charges reflects a goodwill impairment charge of $7.8 million and $3.4 million of asset impairment charges recorded for our Earth Origins retail business, which was disposed in the fourth quarter of fiscal 2018.

Restructuring, Acquisition and Integration Related Expenses

Fiscal 2018 restructuring, acquisition and integration related expense reflects $5.0 million of Supervalu-related acquisition costs, and $4.8 million of restructuring costs and a loss on disposal for our Earth Origins retail business.

Operating Income

Reflecting the factors described above, operating income increased approximately 0.5% , or $1.2 million , to $227.2 million for the fiscal year ended July 28, 2018 , from $226.0 million for the fiscal year ended July 29, 2017 .

As a percentage of net sales, operating income was 2.2% and 2.4% for the fiscal years ended July 28, 2018 and July 29, 2017 , respectively.

Other Expense (Income)

Other expense, net increased $2.9 million to $14.5 million for the fiscal year ended July 28, 2018 , from $11.6 million for the fiscal year ended July 29, 2017 .

Interest expense for the fiscal year ended July 28, 2018 decreased to $16.5 million from $17.1 million for the fiscal year ended July 29, 2017 .

The decrease in interest expense was primarily due to a reduction in outstanding debt year over year.

Interest income was $0.4 million for the fiscal years ended July 28, 2018 and July 29, 2017 .

Other income for the fiscal year ended July 28, 2018 was $1.5 million , compared to other income of $5.2 million for the fiscal year ended July 29, 2017 .

Other income for fiscal 2018 was primarily related to positive returns on the Company's equity method investment.

Other income for fiscal 2017 was primarily related to a $6.1 million gain recorded during the fourth quarter of fiscal 2017 related to the sale of the Company's stake in Kicking Horse Coffee.

Provision for Income Taxes

Our effective income tax rate was 22.1% and 39.3% for the fiscal years ended July 28, 2018 and July 29, 2017 , respectively.

The decrease in the effective income tax rate for the fiscal year ended July 28, 2018 was driven by a $15.5 million tax benefit which was recorded as result of the new lower federal tax rate, as well as a net tax benefit of approximately $21.7 million as a result of the impact of the re-measurement of U.S.

net deferred tax liabilities at the new lower corporate income tax rate resulting from the Tax Cuts and Jobs Act of 2017 (“TCJA”).

Reflecting the factors described in more detail above, net income increased $35.5 million to $165.7 million , or $3.26 per diluted share, for the fiscal year ended July 28, 2018 , compared to $130.2 million , or $2.56 per diluted share for the fiscal year ended July 29, 2017 .

Continuing operations Adjusted EBITDA:

Total continuing operations Adjusted EBITDA

Wholesale’s net sales increase in fiscal 2020 as compared to fiscal 2019 was driven by an incremental 12 weeks of net sales from the acquired Supervalu business of approximately $3,118 million and was partially offset by $455 million from an incremental 53rd week in fiscal 2019, with the remaining increase primarily due to growth in sales to existing customers in the Chains, Supernatural and Independent retailers channels.

Sales growth was primarily driven by demand for center store and natural products from customers response to the COVID-19 pandemic, and was partially offset by lower sales from previously lost customers and stores prior to the pandemic.

Retail’s net sales increase for fiscal 2020 as compared to fiscal 2019 is primarily due to $486 million of an incremental 12 weeks of net sales from the acquired Supervalu business, which was partially offset by the estimated impact from the 53rd week in fiscal 2019 of $40 million .

The remaining increase was driven by increased identical store sales related to the COVID-19 pandemic.

All Retail net sales related to the acquired Supervalu business.

The increase in net sales eliminations in fiscal 2020 and 2019 was primarily due to an increase in Wholesale sales to Retail resulting from the acquired Supervalu retail business, which are eliminated upon consolidation.

Wholesale’s net sales increase in fiscal 2019 as compared to fiscal 2018 was driven by Supervalu net sales of approximately $10.65 billion , which included $252 million from the 53rd week in fiscal 2019, with the remaining increase primarily driven by net sales of our Supernatural channel, the remaining company estimated impact from the 53rd week of approximately $204 million and an increase in Chains net sales, which were partially offset by decreases in Other and Independent retailers net sales.

Retail’s net sales increase for fiscal 2019 as compared to fiscal 2018 was driven by Supervalu net sales of approximately of $1,653 million , which included $40 million from the 53rd week in fiscal 2019.

Adjusted EBITDA

Wholesale’s Adjusted EBITDA increased 28% in fiscal 2020 as compared to fiscal 2019.

The increase was driven by leveraged sales growth, particularly in the second half of fiscal 2020 from increases in food-at-home purchases that drove sales to our customers, an incremental 12 weeks of Adjusted EBITDA from the acquired Supervalu business.

Gross profit dollar growth for fiscal 2020 was $469.3 million with a gross profit rate decrease of approximately 12 basis points, which outpaced operating expense increases, excluding depreciation and amortization and stock-based compensation, of $341.3 million.

Operating expense rate decrease of approximately 29 basis points primarily driven by lower trucking expense, partially offset by higher temporary incentive pay and operating costs related to the COVID-19 pandemic and higher bad debt expense prior to the COVID-19 pandemic.

Wholesale depreciation expense increased $39.3 million to $267.2 million due to an incremental 12 weeks of depreciation and amortization expense from the Supervalu acquisition.

Retail’s Adjusted EBITDA increased 153% in fiscal 2020 as compared to fiscal 2019.

The increase was driven by higher sales volume from the impacts of the COVID-19 pandemic and the incremental 12 weeks of Adjusted EBITDA from the acquired Supervalu business, fixed and variable cost leveraging and lower promotional activity.

Gross profit dollar growth for fiscal 2020 was $197.3 with gross profit rate increasing 92 basis points from lower promotional activity.

Operating expense growth of $140.2 million with an operating expense rate decrease of 92 basis points driven by variable cost leveraging partially offset by higher temporary incentive pay and operating costs related to the COVID-19 pandemic .

Retail depreciation and amortization expense for fiscal 2020 and 2019 relate to finance lease amortization expense associated with leases previously amortizing in continuing operations as they were not previously classified as held for sale.

Starting in the first quarter of fiscal 2021, we expect we will start recording depreciation and amortization expense related to the assets previously classified as held for sale that were moved to continuing operations, as the majority of Retail’s assets were not subject to depreciation and amortization expense.

Other Adjusted EBITDA decreased 138% in fiscal 2020 primarily due to higher incentive compensation costs.

Wholesale’s Adjusted EBITDA increased 35% in fiscal 2019 as compared to fiscal 2018 primarily due to the acquired Supervalu Wholesale business, which reflected 41 weeks of results, and growth in the legacy Wholesale business driven by higher sales.

Gross profit dollar growth for fiscal 2019 was $1,252.9 million, of which $1,176.3 million was attributable to the acquired Supervalu business.

Operating expense, excluding depreciation and amortization and stock-based compensation, dollar growth for fiscal 2019 was $1,133.1 million, of which $988.8 million was attributable to the acquired Supervalu business.

Wholesale’s depreciation and amortization expense increased $143.0 million to $227.9 million in fiscal 2019.

All of the increase in Retail’s Adjusted EBITDA in fiscal 2019 as compared to fiscal 2018 resulted from the acquired Supervalu retail business, which reflected 41 weeks of results.

Retail did not have any depreciation expense that was attributed to it because of its previous held for sale status.

LIQUIDITY AND CAPITAL RESOURCES

Our total debt increased $2,587.6 million to $2,906.5 million as of August 3, 2019 from $318.8 million as of July 28, 2018 , primarily related to the additional borrowings under the Term Loan Facility and ABL Credit Facility to finance the Supervalu acquisition, and loans to finance equipment and improvements to the Harrisburg, PA and Centralia, WA distribution centers.

These increases in debt were partially offset by payments made from free cash flow generated from operations and distribution center property sales and proceeds from retail store sales, both discussed above.

Scheduled debt maturities are expected to be $102.7 million in fiscal 2020 and payments to reduce capital lease obligations are expected to be approximately $24.7 million in fiscal 2020.

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

We expect to be able to fund fiscal 2020 debt maturities of $102.7 million through internally generated funds, proceeds from the asset sales, borrowings under the ABL Credit Facility or new debt issuances.

Unused available credit under our revolving line of credit increased $269.0 million to $919.2 million as of August 3, 2019 from $650.2 million as of July 28, 2018 , due to the larger borrowing capacity supported by the larger borrowing base under the ABL Credit Facility put in place in conjunction with the Supervalu acquisition, partially offset by higher levels of outstanding borrowings under the facility resulting from the Supervalu acquisition.

Cash and cash equivalents increased $19.0 million to $42.4 million as of August 3, 2019 from $23.3 million as of July 28, 2018 , primarily due to cash from the acquired Supervalu business.

Working capital increased $369.3 million to $1,459.0 million as of August 3, 2019 from $1,089.7 million as of July 28, 2018 , primarily due to the acquisition of Supervalu’s working capital, offset in part by a larger current maturity under the Term Loan Facility than the prior term loan facility, which it replaced.

Total liquidity as of August 1, 2020 was $1.28 billion and was comprised of the following:

Unused credit under our revolving line of credit was $1,234.8 million as of August 1, 2020 , which increased $315.6 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 $47.0 million as of August 1, 2020 , which increased $2.5 million from $44.5 million as of August 3, 2019 .

Our total debt decreased $408.9 million to $2,497.6 million as of August 1, 2020 from $2,906.5 million as of August 3, 2019 primarily related net payments made on the ABL Credit Facility and our 364-day Term Loan Facility payment.

In fiscal 2021, we are obligated to make a $72.0 million prepayment from Excess Cash Flow (as defined in the Term Loan Agreement) generated in fiscal 2020, which we satisfied with a $72.0 million payment in the first quarter of fiscal 2021.

Other debt maturities are expected to be $12.8 million in fiscal 2021.

We are also obligated to make payments to reduce finance lease obligations.

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 continue to annually reduce our long-term debt and 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.

Working capital decreased $115.1 million to $1,334.8 million as of August 1, 2020 from $1,450.0 million as of August 3, 2019 , primarily due to the adoption of the new lease standard from the recognition of a new current portion liability for operating leases, an increase in accounts payable, partially offset by increases in inventories to support higher service levels and accounts receivable from higher sales.

Sources and Uses of Cash

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In addition, we are limited in the aggregate amount of dividends that we may pay under the terms of our Term Loan Facility and our ABL Credit Facility.

Subject to certain limitations contained in our debt agreements and as market conditions warrant, we may from time to time refinance indebtedness that we have incurred, including through the incurrence or repayment of loans under existing or new credit facilities or the issuance or repayment of debt securities.

Long-Term Debt

During fiscal 2019, our capital structure materially changed in connection with the Supervalu acquisition.

We repaid all amounts outstanding under our prior asset-based revolving credit facility and term loan facility entered into in August 2014, as amended with proceeds from the ABL Credit Facility and the Term Loan Facility.

In fiscal 2019, we borrowed $1,475.0 million under the ABL Credit Facility and $1,950.0 million under the Term Loan Facility to finance the Supervalu acquisition.

During the second quarter of fiscal 2019, we paid $566.4 million to extinguish the remaining $350.0 million of 7.75% Supervalu Senior Notes and the remaining $180.0 million of 6.75% Supervalu Senior Notes (together with the 7.75% Supervalu Senior Notes, the “Supervalu Senior Notes”) assumed in conjunction with the Supervalu acquisition and paid the related prepayment premiums and accrued interest with restricted cash set aside on the closing date of the acquisition for this purpose.

In addition, during fiscal 2019 we made mandatory prepayments of $85.1 million under the Term Loan Facility with asset sale proceeds.

During fiscal 2020, we repaid a net $323.3 million under the ABL Credit Facility and repaid $91.9 million of scheduled maturities and voluntary prepayments under the Term Loan Facility.

Refer to Note 10—Long-Term Debt in Part II, Item 8 of this Annual Report on Form 10-K 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.

We were not subject to the fixed charge coverage ratio covenant under the ABL Loan Agreement during fiscal 2019.

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 Annual Report.

The ABL Loan Agreement and the Term Loan Agreement contain certain customary operational and informational covenants.

If we fail to comply with any of these covenants, we may be in default under the applicable loan agreement, and all amounts due thereunder may become immediately due and payable.

The following chart outlines our scheduled debt maturities by fiscal year, which excludes debt prepayments, which may be required from Excess Cash Flow (as defined in the Term Loan Agreement) or proceeds from sales of mortgaged properties.

The following chart outlines our scheduled debt maturities by fiscal year, which excludes debt prepayments that may be required from proceeds from sales of mortgaged properties and, for periods beyond fiscal 2021, prepayments that may be required by Excess Cash Flow (as defined in the Term Loan Agreement).

Derivatives and Hedging Activity

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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 August 3, 2019 , we had an aggregate of $2.20 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 December 2019 and October 2025.

As of August 1, 2020 , we had an aggregate of $1.99 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 October 2020 and October 2025 .

The fair value of these interest rate derivatives represents a total net liability of $138.7 million and are subject to volatility based on changes in market interest rates.

See Note 9—Derivatives in Part II, Item 8 and —Interest Rate Risk within Item 7A of this Annual Report on Form 10-K for additional information.

From time-to-time, we enter into fixed price fuel supply agreements.

As of August 3, 2019 and July 28, 2018 , we were not a party to any such agreements.

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

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

Gains and losses and the financial position in these arrangements are insignificant.

Capital Expenditures

Our capital expenditures for fiscal 2019 were $207.8 million , compared to $44.6 million for fiscal 2018, an increase of $163.2 million driven primarily by distribution center expansions, new distribution centers, and higher capital expenditures attributable to Supervalu.

Fiscal 2019 capital spending included the Ridgefield expansion, and construction of the new Centralia and Moreno Valley distribution centers.

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

Longer term, capital spending is expected to be approximately 1.0% of net sales.

Our capital expenditures for fiscal 2020 were $172.6 million , compared to $228.5 million for fiscal 2019 , a decrease of $55.9 million primarily driven by lower distribution center expansion investments in fiscal 2020 compared to 2019.

Fiscal 2020 principally includes capital expenditures for distribution center expansions, primarily in Ridgefield, WA and Moreno Valley, CA, as well as information technology, and equipment.

Fiscal 2021 capital spending is expected to be in the range of $200.0 million to $250.0 million and include projects that optimize and expand our distribution network and our technology platform.

Longer term, capital spending is expected to be at or below 1.0% of net sales.

We expect to finance requirements with cash generated from operations and borrowings under our ABL Credit Facility.

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Net cash used in investing activities of continuing operations

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

Net cash (used in) provided by financing activities

Net cash flows from discontinued operations

Effect of exchange rate on cash

Net increase (decrease) in cash and cash equivalents

Net increase in cash and cash equivalents

Cash and cash equivalents, at beginning of period

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Fiscal 2020 compared to Fiscal 2019

The increase in net cash provided by operating activities of continuing operations was primarily due to higher amounts of cash provided in fiscal 2020 related to higher earnings before the goodwill impairment charges and depreciation and amortization expense, cash received from income taxes in fiscal 2020 compared to cash paid for income taxes in fiscal 2019, and lower payments for assumed liabilities and transaction costs, which were partially offset by uses of cash to build inventory.

In fiscal 2019, 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 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 $2,292.4 million of cash paid to purchase Supervalu in fiscal 2019 and $55.9 million of lower cash payments for capital expenditures, partially offset by $33.0 million of less cash received from the sale of property and equipment, primarily due to lower cash received from the sale of distribution centers.

In fiscal 2019, we received cash from the sale and leaseback of two distribution centers, one of which was a shorter-term lease related to the exit of that facility.

In fiscal 2020, we received cash proceeds from the sale of five distribution centers, one of which contained a shorter-term leaseback 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 borrowings on long-term debt to finance the Supervalu acquisition, and a net decrease in cash provided by the revolving credit facility borrowings of $1,193.1 million , which was driven by borrowings to finance the Supervalu acquisition in fiscal 2019, offset in part by net payments made in fiscal 2020 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 $657.6 million driven by the repayment of acquired senior notes in fiscal 2019 and $62.6 million of payments for debt issuance costs in fiscal 2019.

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

The decrease in net cash flows from discontinued operations is primarily due to higher proceeds received in fiscal 2019 related to the sale of retail locations, including Hornbacher’s, than proceeds received in fiscal 2020, including proceeds from the sale of a former dedicated retail distribution center and retail stores.

Fiscal 2019 compared to Fiscal 2018

The increase in net cash provided by operating activities of continuing operations was primarily due to higher amounts of cash utilized in fiscal 2018 in inventory acquisition and credit extension to meet increased product demand and our service level agreements and cash provided in fiscal 2019 by the reduction of inventory, including cash inflows from the reduction of Supervalu inventory since the acquisition date, as the acquisition occurred at a time when inventories were seasonally high.

These increases were offset in part by cash utilized in payments of assumed liabilities from the Supervalu acquisition, including transaction-related expenses, accrued employee costs, and restructuring costs associated with reductions in force, higher cash paid for interest expense, higher cash utilized to reduce accounts payable primarily related to inventory reductions, and higher cash paid for taxes including a $59 million cash tax payment related to the Supervalu acquisition.

The increase in net cash used in investing activities of continuing operations was primarily due to $2,292.4 million paid for the Supervalu acquisition and an increase of $163.2 million in cash utilized for capital expenditures, partially offset by cash received from the sale and leaseback of two distribution centers, and the sale of two surplus facilities, for aggregate proceeds of $172.5 million , as discussed above.

The increase in net cash used in investing activities of continuing operations was primarily due to $2,292.4 million paid for the Supervalu acquisition and an increase of $183.9 million in cash utilized for capital expenditures, partially offset by cash received from the sale and leaseback of two distribution centers, and the sale of two surplus facilities, for aggregate proceeds of $172.5 million .

The increase in net cash provided by financing activities of continuing operations was primarily due to borrowings on long-term debt of $1,926.6 million to finance the Supervalu acquisition, a net increase in revolving credit facility borrowings of $883.4 million, including payments to finance the Supervalu acquisition, the absence of cash utilized to repurchase common stock in fiscal 2019 compared to $24.2 million in fiscal 2018, an increase in proceeds from the issuance of common stock in fiscal 2019 of $23.0 million, and other borrowings of $22.4 million in fiscal 2019, partially offset by an increase in repayments of long-term debt and capital lease obligations of $767.8 million , including the repayment of the Supervalu Senior Notes, payments for debt financing costs of $62.6 million .

Net cash flows from discontinued operations primarily include operating activity cash flow from operating income and investing activity cash inflows from the sale of Hornbacher’s, a surplus distribution center, and surplus retail stores, partially offset by capital expenditures of discontinued operations.

Fiscal 2018 compared to Fiscal 2017

Net cash provided by operations was $109.0 million for the fiscal year ended July 28, 2018, a decrease of $164.3 million from the $273.3 million provided by operations for the year ended July 29, 2017.

The primary reasons for the net cash provided by operating activities for fiscal 2018 were net income for the year of $165.7 million , which included depreciation and amortization of $87.6 million , and share based compensation expense of $25.8 million , offset by increases in inventory and accounts receivable of $108.8 million and $67.3 million , respectively.

Net cash provided by operations of $273.3 million for the year ended July 29, 2017 was primarily due to net income for the year of $130.2 million , which included depreciation and amortization of $86.1 million , and an increase in accounts payable of $82.8 million , offset by an increase in accounts receivable of $38.8 million .

Working capital increased by $131.0 million , or 13.7% , to $1.09 billion at July 28, 2018, compared to working capital of $958.7 million at July 29, 2017.

This increase was primarily as a result of an increase in inventory to support increased demand for our products.

Net cash used in investing activities decreased approximately $13.0 million to $47.0 million for the fiscal year ended July 28, 2018, compared to $60.0 million for the fiscal year ended July 29, 2017.

This decrease was primarily due to a decrease in cash paid for acquisitions of $9.2 million and a $11.5 million decrease in capital spending.

Net cash used in financing activities was $53.6 million for the fiscal year ended July 28, 2018.

The net cash used in financing activities was primarily due to repayments of borrowings under our prior asset-backed revolving credit facility of $569.7 million , share repurchases of $24.2 million and repayments of long-term debt of $12.1 million , partially offset by proceeds from borrowings under our prior asset-backed revolving credit facility of $556.1 million .

Net cash used in financing activities was $217.1 million for the fiscal year ended July 29, 2017 and was primarily due to repayments of borrowings under our prior asset-backed revolving credit facility and long term debt of $418.7 million and $11.5 million , respectively, partially offset by proceeds from borrowings under our prior asset-backed revolving credit facility of $215.7 million .

Net cash flows from discontinued operations primarily include investing activity cash inflows from the sale of Hornbacher’s, a surplus distribution center, and surplus retail stores, and operating activity cash flow from operating income, partially offset by capital expenditures of discontinued operations.

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 repurchased 614,660 shares of our common stock at an aggregate cost of $24.2 million in fiscal 2018.

We did not purchase any shares of the Company’s common stock under the share repurchase program in the fiscal 2019.

We did not repurchase any shares of our common stock in fiscal 2020 or 2019 pursuant to the share repurchase program.

As of August 1, 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 2021.

Additionally, our ABL Credit Facility and Term Loan Facility contain terms that limit our ability to repurchase of common stock above certain levels unless certain conditions and financial tests are met.

We no longer intend to indefinitely reinvest accumulated earnings in our Canada operations.

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We contributed $16.1 million and $2.6 million to our defined benefit pension and other postretirement benefit plans, respectively, in fiscal 2020.

In fiscal 2020, $8.3 million of minimum pension contributions are required to be made under the Unified Grocers, Inc.

Cash Balance Plan under Employee Retirement Income Security Act of 1974, as amended (“ERISA”).

No minimum pension contributions are required to be made to the SUPERVALU Retirement Plan under ERISA in fiscal 2020.

We anticipate fiscal 2020 discretionary pension contributions and required minimum other postretirement benefit plan contributions to be approximately $0 million to $6 million.

In fiscal 2021, no minimum pension contributions are required to be made under the Unified Grocers, Inc.

Cash Balance Plan or the SUPERVALU Retirement Plan under Employee Retirement Income Security Act of 1974, as amended (“ERISA”).

The Company expects to contribute approximately $0 million to $5.3 million to its defined benefit pension plans and postretirement benefit plans in fiscal 2021.

We fund our defined benefit pension plans based on the minimum contribution amount required under ERISA, the Pension Protection Act of 2006 and other applicable laws, as determined by us, including our external actuarial consultant, and additional contributions made at our discretion.

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Lump Sum Pension Settlement Offering

On August 1, 2019, we amended the SUPERVALU Retirement Plan to provide for a lump sum settlement window.

On August 2, 2019, we sent plan participants lump sum settlement election offerings that committed the SUPERVALU Retirement Plan to pay certain deferred vested pension plan participants and retirees, that make such an election, a lump sum payment in exchange for their rights to receive ongoing payments from the plan.

The lump sum payment amounts are equal to the present value of the participant’s pension benefits, and will be made to certain former (i) retired associates and beneficiaries who are receiving their monthly pension benefit payment and (ii) terminated associates who are deferred vested in the Plan, had not yet begun receiving monthly pension benefit payments and who are not eligible for any prior lump sum offerings under the plan.

Benefit obligations associated with the lump sum offering have been incorporated into the funded status utilizing the actuarially determined lump sum payments based on estimated offer acceptances.

The Company expects the Plan to make lump sum settlement payments to Plan participants on or around November 1, 2019, which we anticipate will result in a required remeasurement of the defined benefit pension obligations under the plan at that time.

On August 1, 2019, the Company amended the SUPERVALU Retirement Plan to provide for a lump sum settlement window.

On August 2, 2019, the Company sent plan participants lump sum settlement election offerings that committed the plan to pay certain deferred vested pension plan participants and retirees, who make such an election, a lump sum payment in exchange for their rights to receive ongoing payments from the plan.

The lump sum payment amounts are equal to the present value of the participant’s pension benefits, and were made to certain former (i) retired associates and beneficiaries who are receiving their monthly pension benefit payment and (ii) terminated associates who are deferred vested in the plan, had not yet begun receiving monthly pension benefit payments and who are not eligible for any prior lump sum offerings under the plan.

Benefit obligations associated with the lump sum offering have been incorporated into the funded status utilizing the actuarially determined lump sum payments based on offer acceptances.

The plan made aggregate lump sum settlement payments of $690.0 million to plan participants during fiscal 2020.

The lump sum settlement payments resulted in non-cash pension settlement charge of $11.3 million in fiscal 2020 from the acceleration of a portion of the accumulated unrecognized actuarial loss, which was based on the fair value of SUPERVALU Retirement Plan assets and remeasured liabilities.

As a result of the settlement payments reported in the second quarter of fiscal 2020, the SUPERVALU Retirement Plan obligations were remeasured using a discount rate of 3.1 percent and the MP-2019 mortality improvement scale.

This remeasurement resulted in a $1.5 million decrease to Accumulated other comprehensive loss.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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We concluded that the LIFO method of inventory costing is preferable because it allows for better matching of costs and revenues, as historical inflationary inventory acquisition prices are expected to continue in the future and the LIFO method uses the current acquisition cost to value cost of goods sold as inventory is sold.

Additionally, LIFO allows for better comparability of the results of our operations with those of similar companies in its peer group.

As a result of the change to the LIFO method, certain Company inventories, excluding Supervalu inventories, were reduced by $15.0 million for fiscal 2019, which resulted in increases to Cost of sales and Loss from continuing operations before income taxes of the same amount in the Consolidated Statements of Operations for fiscal 2019.

Additionally, LIFO allows for better comparability of the results of our operations with those of similar companies in our peer group.

If the first-in, first-out method had been used, Inventories, net would have been higher by approximately $43.3 million and $25.4 million for fiscal 2020 and 2019, respectively.

As of August 1, 2020, approximately $1.8 billion inventory was valued under the LIFO method and primarily included grocery, frozen food and general merchandise products, with the remaining inventory valued under the FIFO method and primarily included meat, dairy and deli products.

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Each 25 basis point reduction in the discount rate would increase the postretirement benefit obligation by $73 million, as of August 1, 2020 , and for fiscal 2021 would decrease pension expense by approximately $3.9 million and each 25 basis point reduction in expected return on plan assets would increase pension expense by approximately $4.9 million .

Similarly, for postretirement benefits, a 100 basis point increase in the healthcare cost trend rate would increase the accumulated postretirement benefit obligation by approximately $3.2 million as of the end of fiscal 2019 and would increase service and interest cost by less than $0.1 million .

Conversely, a 100 basis point decrease in the healthcare cost trend rate would decrease the accumulated postretirement benefit obligation as of the end of fiscal 2019 by approximately $2.6 million and would decrease service and interest cost by less than $0.1 million .

Although we believe our assumptions are appropriate, the actuarial assumptions may differ from actual results due to changing market and economic conditions, higher or lower withdrawal rates and longer or shorter life spans of participants.

Similarly, for postretirement benefits, a 100 basis point increase in the healthcare cost trend rate would increase the accumulated postretirement benefit obligation by approximately $0.8 million as of the end of fiscal 2020 and would increase service and interest cost for fiscal 2021 by less than $0.1 million .

Conversely, a 100 basis point decrease in the healthcare cost trend rate would decrease the accumulated postretirement benefit obligation as of the end of fiscal 2020 by approximately $0.7 million and would decrease service and interest cost for fiscal 2021 by less than $0.1 million .

We recognize the amortization of net actuarial loss on the SUPERVALU Retirement Plan and the Unified Grocers Inc.

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In order for a planned disposition to be classified as a business held for sale, the established criteria must be met as of the reporting date, including an active program to market the business and the expected disposition of the business within one year.

When a business is classified as held for sale, the Company evaluates each reporting period whether it continues to meet the criteria as held for sale.

Planned business dispositions are presented as discontinued operations when all the criteria described above are met.

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If actual claims incurred are greater than those anticipated, our reserves may be insufficient and additional costs could be recorded in our Consolidated Financial Statements.

Accruals for workers’ compensation, general and automobile liabilities totaled $88.8 million and $24.7 million as of August 3, 2019 and July 28, 2018 , respectively.

Accruals for workers’ compensation, general and automobile liabilities totaled $100.7 million and $88.8 million as of August 1, 2020 and August 3, 2019 , respectively.

Valuation of assets and liabilities acquired in a business combination

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The significant qualitative and economic characteristics used in determining our components to support their aggregation include types of businesses and the manner in which the components operate, consideration of key impacts to net sales, cost of sales, competitive risks and the extent to which components share assets and other resources.

Based an interim fiscal 2019 quantitative assessment, the Supervalu distribution reporting unit’s fair value was substantially less than its carrying value and the entire amount of goodwill from the acquisition that was attributed to the reporting unit was impaired.

If we were to change the composition of our reporting units, such that the unrealized fair value deficit over the carrying value was subject to measurement as part of the recoverability of other reporting units, under a new basis of reporting units, we may incur additional impairment charges.

Goodwill has been assigned as of the acquisition date of the respective components.

Goodwill has only been allocated upon a business’s disposal or upon achievement of criterion to classify an existing component as a new reporting unit.

Total goodwill by reporting unit is as follows:

(in thousands)

August 3, 2019

Legacy Company distribution

Blue Marble Brands

Woodstock Farms

Supervalu distribution

Total Goodwill

A qualitative review may be conducted to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

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In fiscal 2019, we performed two qualitative reviews, and as a result of one of the qualitative reviews a quantitative review of goodwill was conducted in the second quarter of fiscal 2019.

During fiscal 2019, we recorded a total impairment charge of $292.8 million to goodwill related to the acquired Supervalu distribution business.

For the fiscal 2019 quantitative assessment, we estimated the fair value for our reporting units, utilizing the income and market approaches, which were weighted on a 50:50 basis to determine each reporting unit’s fair value.

During fiscal 2019, we recorded a total impairment charge of $292.8 million related to the acquired Supervalu distribution business.

In fiscal 2020, we performed two qualitative reviews, and the results of one quantitative review in the first quarter of fiscal 2020 resulted a goodwill impairment charge of $421.5 million .

For the fiscal 2019 and 2020 quantitative assessments, we estimated the fair value for our reporting units, utilizing the income and market approaches, which were weighted on a 50:50 basis to determine each reporting unit’s fair value.

Estimates that were sensitive to the fair value determination under income and market approach, include forecasted revenues, operating expenses, income tax expenses, depreciation and amortization expenses and discount rates.

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A valuation allowance is provided when the Company concludes, based on all available evidence, that it is more likely than not that the deferred tax assets will not be realized during the applicable recovery period.

On December 22, 2017, the U.S.

government enacted comprehensive tax legislation under the TCJA.

The TCJA makes broad and complex changes to the U.S.

tax code, including reducing the U.S.

federal corporate tax rate from 35 percent to 21 percent, effective January 1, 2018.

Shortly after the TCJA was enacted, the Securities and Exchange Commission (“SEC”) issued accounting guidance, which provides a one-year measurement period during which a company may complete its accounting for the impacts of the TCJA.

To the extent a company’s accounting for certain income tax effects of the TCJA is incomplete, the company may determine a reasonable estimate for those effects and record a provisional estimate in its financial statements.

See Note 15—Income Taxes for further effects of the new tax legislation on the Company.

Lease accounting

In fiscal 2020, we adopted the new lease accounting guidance and elected the allowable option under the guidance to not restate comparative periods in the year of adoption (fiscal years 2019 and prior).

Under the new guidance, we determine if an arrangement is a lease at inception or modification of a contract and classify each lease as either an operating or finance lease at commencement, resulting in the recognition of lease assets and liabilities for the majority of our leases.

Finance and operating lease assets represent our right to use an underlying asset as lessee for the lease term, and lease obligations represent our obligation to make lease payments arising from the lease.

These assets and obligations are recognized at the lease commencement date based on the present value of lease payments, net of incentives, over the lease term.

Significant judgment is required to determine our incre mental borrowing rate, which impacts the determination of lease classification and the present value of lease payments.

Generally, our lease contracts do not provide a readily determinable implicit rate and, therefore, we use an estimated incremental borrowing rate as of the lease commencement date in determining the present value of lease payments.

The estimated incremental borrowing rate reflects considerations such as market rates for our outstanding collateralized debt, interpolations of rates for leases with terms that differ from our outstanding debt, and market rates for debt of companies with similar credit ratings.

Given the significant operating lease assets and liabilities recorded, changes in the estimates made by management or the underlying assumptions could have a material impact on our Consolidated Financial Statements.

COMMITMENTS, CONTINGENCIES, AND OFF-BALANCE SHEET ARRANGEMENTS

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However, the amount of any increase or decrease in contributions will depend on a variety of factors, including the results of our collective bargaining efforts, investment returns on the assets held in the plans, actions taken by the trustees who manage the plans and requirements under the Pension Protection Act of 2006, the Multiemployer Pension Reform Act and Section 412(e) of the Internal Revenue Code.

Furthermore, if we were to significantly reduce contributions, exit certain markets or otherwise cease making contributions to these plans, we could trigger a partial or complete withdrawal that could require us to make withdrawal liability payments to the fund.

Expense is recognized in connection with these plans as contributions are funded, in accordance with GAAP.

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In fiscal 2021, we expect to contribute approximately $45.2 million related to continuing operations contributions to the multiemployer pension plans, subject to the outcome of collective bargaining and capital market conditions.

Furthermore, if we were to significantly reduce contributions, exit certain markets or otherwise cease making contributions to these plans, it could trigger a partial or complete withdrawal that would require us to record a withdrawal liability.

Any withdrawal liability would be recorded when it is probable that a liability exists and can be reasonably estimated, in accordance with GAAP.

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Operating leases (5)

Capital leases (6)

Finance leases (6)

Purchase obligations (7)

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Multiemployer plan withdrawal liabilities

Deferred compensation

Total contractual obligations

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Long-term debt amounts exclude original issue discounts and deferred financing costs.

Long-term debt payments due per period exclude any cash prepayments that may be required under the provisions of the Term Loan Facility because future prepayment amounts, if any, are not reasonably estimable as of August 3, 2019 .

Long-term debt payments due per period exclude any cash prepayments that may be required under the provisions of the Term Loan Facility except for the $72 million prepayment from Excess Cash Flow in fiscal 2020 that is required in fiscal 2021 because the amount of any future additional prepayment amounts, if any, are not reasonably estimable as of August 1, 2020 .

Amounts include contractual interest payments (net of our interest rate swap payments) using the face value and applicable interest rate as of August 1, 2020 .

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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 7. Management’s Discussion and Analysis