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Item 7. Management’s Discussion and Analysis

2021-09-28 compared with 2020-09-29 · 406 added, 557 removed, 300 unchanged (76% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and the notes thereto appearing elsewhere in this Annual Report.

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and the notes thereto, “Risk Factors” included in Part I, Item IA, “Forward-looking Statements” and other risks described elsewhere in this Annual Report.

FORWARD-LOOKING STATEMENTS

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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;

• the impact and duration of the COVID-19 pandemic;

• labor and other workforce shortages and challenges;

• our dependence on principal customers;

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

• 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;

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;

• the relatively low margins of our business, which are sensitive to inflationary and deflationary pressures;

• our ability to realize anticipated benefits of our acquisitions and strategic initiatives, including, our acquisition of Supervalu;

• 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;

• our ability to continue to grow sales, including of our higher margin natural and organic foods and non-food products, and to manage that growth;

• 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;

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

• increased competition in our industry, including as a results of continuing consolidation of retailers and the growth of chains;

• 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;

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

• moderated supplier promotional activity, including decreased forward buying opportunities;

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 potential for additional asset impairment charges;

our sensitivity to inflationary and deflationary pressures;

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

• the potential for additional asset impairment charges;

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

• our ability to maintain food quality and safety;

• volatility in fuel costs;

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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 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:

As a leading distributor of natural, organic, specialty, produce and conventional grocery and non-food products, and provider of support services to retailers 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 nearly 300,000 products consisting of national, regional and private label brands grouped into six product categories:

grocery and general merchandise;

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and personal care items.

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.

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.

We believe we are North America’s premier wholesaler with 57 distribution centers and warehouses representing approximately 30 million square feet of warehouse space.

We are a coast-to-coast distributor with customers in all fifty states as well as all ten provinces in Canada, making us a desirable partner for retailers and consumer product manufacturers.

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, as well as international customers with wide-ranging needs.

Our business is classified into two reportable segments:

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

Fiscal 2020 and 2021

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.

Over the past two years, we have substantially completed the integration of Supervalu and have turned our focus to transforming the business for further future growth.

Our operating performance in fiscal 2021 benefited from the shift in food-at-home consumption resulting from the continued impacts of the COVID-19 global pandemic, and we expect to continue to benefit from ongoing changes in consumer purchasing behavior.

Late in fiscal 2021, we introduced our Fuel the Future strategy with the mission of making our customers stronger, our supply chain better and our food solutions more inspired.

Fuel the Future is composed of six strategic pillars, which are detailed in Part I.

Collectively, the tactics and plans behind each pillar are meant to capitalize on our unique position in the food distribution industry, including the number and location of distribution centers we operate, the array of services and the data driven insights that we are able to customize for each of our customers, our innovation platforms and the growth potential we see in each, our commitment to our people and the planet, the positioning of our retail operations, and our focus on delivering returns for our shareholders.

We also introduced our ValuePath initiative early in fiscal 2021, pursuant to which we plan to improve operating performance through various initiatives planned to be implemented through the end of fiscal 2023.

We plan to re-invest a portion of these operating savings in the business to drive market share gains, accelerate innovation, invest in automation and maintain competitive wage scales for our frontline workers.

We will continue to use free cash flow to reduce outstanding debt and are committed to improving 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.

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.

A key component of our historical growth has been to acquire distribution companies differentiated by product offerings, service offerings and market area.

We believe the Supervalu acquisition allows us to better serve our wholesale customers’ needs and compete in the current environment by providing additional warehouse and transportation capacity, which has enabled 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 recently introduced our Fuel the Future strategy, which we believe will further accelerate our growth through increasing sales of products and services, providing tailored, data-driven solutions to help our existing customers run their business more efficiently and contributing to new customer acquisitions.

We believe the key drivers for growth through new customers will come from the benefits of our significant scale, product and service offerings, and nationwide footprint, which we believe were demonstrated by the following larger customer developments in fiscal 2021.

• We’ve recently begun delivering product to Key Food Stores co-operative, Inc.

(“Key Food”), a Co-Operative of over 300 grocery stores, after being selected as Key Food’s primary wholesaler.

Our supply agreement with Key Food has a term of 10 years with expected sales over that period of approximately $10 billion.

• 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;

On March 3, 2021, we entered into an amendment to our distribution agreement dated October 30, 2015.

The amendment extended the term of the distribution agreement from September 28, 2025 to September 27, 2027.

Trends and Other Factors Affecting our Business

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

Over the past several decades, total food expenditures on a constant dollar basis within the United States has continued to increase, 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.

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

In fiscal 2020 and continuing into fiscal 2021, the COVID-19 pandemic, which we refer to as the pandemic, led to a significant increase in food-at-home expenditures as a percentage of total food expenditures.

We experienced increases in Net sales and Gross profit due to higher Wholesale customer purchases.

Retail experienced similar trend increases in Net sales and Gross profit from sales to end consumers.

We expect that food-at-home expenditures as a percentage of total food expenditures will remain elevated in the near term compared to pre-pandemic levels.

We believe that changes in work being done outside of the traditional office setting will continue to contribute to more food being consumed at home.

The pandemic also drove significant growth in eCommerce utilization by grocery consumers, and we expect that trend to continue.

We expect to benefit from this trend through the growth of our traditional eCommerce customers, our Community Marketplace, an online marketplace connecting suppliers and retailers, and EasyOptions, which directly services non-traditional customers, such as bakeries or yoga studios, and through customers adopting our turnkey eCommerce platform.

We expect to continue to benefit from elevated sales as compared to historical periods prior to the pandemic while food-at-home expenditures as a percentage of total food expenditures remains higher than recent historical periods prior to the pandemic.

Trends in increased sales and gross margin benefits have lessened since the initial onset of the pandemic.

The ultimate impact on our results is uncertain and dependent upon future developments, including the severity and duration of the pandemic, including any resurgence of infection rates and new variants with higher transmissibility, any economic downturn, actions taken by governmental authorities and other third parties in response to the pandemic such as social distancing orders or companies’ remote work policies, the impact on capital and financial markets, food-at-home purchasing levels and other consumer trends, each of which is uncertain and rapidly changing.

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

Considerable uncertainty remains regarding the future impact of the pandemic on our business.

We 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.

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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.

We recently began experiencing a tighter operating labor market for our warehouse and driver associates, which has caused additional reliance and higher costs from third-party resources, and incremental hiring and wage costs.

We believe this operating environment has been impacted by labor force availability and the pandemic.

We are working to implement actions to fill open roles and maintain existing and future employment levels.

Distribution Center Network

Network Optimization and Construction

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.

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

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.

We are now supplying customers served by former Pacific Northwest locations from our Centralia, WA, Ridgefield, WA and Gilroy, CA distribution centers.

In order to maintain and stabilize service levels of these higher volume Pacific Northwest distribution centers, we incurred incremental operating costs in fiscal 2021 that we believe temporarily reduced the realization of synergy benefits from this network consolidation.

To support our continued growth within southern California, we began operating a newly leased facility in Riverside, CA 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 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.

Operating Efficiency

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.

On February 24, 2020, we executed a purchase option with a delayed purchase provision to acquire the real property of this distribution center for approximately $152 million.

We entered into an agreement to monetize the real property of this location through a sale-leaseback transaction, which is contingent upon the acquisition of the facility that we expect will occur on or before June 2022.

In fiscal 2022, we started operating our Allentown, PA distribution center with a capacity of 1.3 million square feet that will be utilized to service Key Food and other customers in that facility’s geographical area.

We expect to incur initial start-up costs and operating losses in fiscal 2022 as the volume in this facility ramps up to match it’s expected full operating capacity.

Network Technology Efficiency

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 onto one nationalized platform across the organization.

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 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 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 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.

Actions associated with retail divestitures and adjustments to our core cost structure for our wholesale food distribution business are expected to result in headcount reductions and other costs and charges.

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 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 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.

Retail Operations

We currently operate 74 continuing operations Retail grocery stores, including 53 Cub Foods corporate stores and 21 Shoppers Food Warehouse stores.

In addition, we supply another 27 Cub Foods stores operated by our Wholesale customers through franchise and LLC arrangements.

We operate 81 pharmacies primarily within the stores we operate and the stores of our franchisees.

In addition, we operate 22 “Cub Wine and Spirit” and “Cub Liquor” stores.

We had previously announced our intention to thoughtfully and economically divest our retail businesses acquired as part of the Supervalu acquisition to focus on our core Wholesale distribution business.

At this time, we do not have any current plans to divest our Retail business.

We continue to strive to maximize the operating value of Retail.

As part of that strategy, our new strategic focus is to invest in our stores and optimize our operations to be customer centric.

We continue to remodel and upgrade our stores, while investing in eCommerce growth in the form of click-and-collect, delivery, and technology investments, such as mobile customer applications.

Part of our optimization efforts included updating our benefit plan offerings to a defined contribution plan as a replacement for a multiemployer pension plans to which we contribute pursuant to three Cub Foods collective bargaining agreements.

In fiscal 2021, we withdrew from participating in three Retail multiemployer pension plans, resulting in a $63 million withdrawal charge, which is recorded within Operating expenses within our Consolidated Statements of Operations, Other long-term liabilities on the Consolidated Balance Sheets and within changes in operating assets and liabilities within Accrued expenses and other liabilities in the Consolidated Statements of Cash Flows.

As part of our optimization efforts, we are continuing to evaluate various options to address our off-balance sheet liability under certain of our Retail multiemployer pension plans, which actions may result in significant costs or charges.

The extent of these costs and charges will be determined based on outcomes achieved under the process undertaken to minimize or eliminate the liability for the respective multiemployer pension plan.

As we continue to work to find solutions to under-funded multiemployer pension plans, it is possible we could incur withdrawal liabilities for certain additional multiemployer pension plan obligations in the future as we actively bargain collective agreements with a number of our unions in due course.

Beyond this immaterial plan, 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.

A withdrawal from a multiemployer pension plan may result in an obligation to make material payments over an extended period of time or one-time lump sum payments on a net present value basis.

In the fourth quarter of fiscal 2021, we determined we no longer met the held for sale criterion for a probable sale to be completed within 12 months for two of the four Shoppers retail stores that were previously included within discontinued operations due to the criterion being met as of the Supervalu acquisition date.

We revised our Consolidated Financial Statements to reclassify these stores from discontinued operations to continuing operations.

This change in financial statement presentation resulted in the inclusion of these stores’ results of operations, financial position, cash flows and related disclosures within continuing operations for all periods presented in the Consolidated Financial Statements and presented below.

In addition, in order to present these stores’ results of operations within continuing operations, Wholesale sales to these additional Retail stores have been eliminated upon consolidation.

Our discontinued operations as of the end of the fourth quarter of fiscal 2021 include two 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 or closed in fiscal 2020 and fiscal 2021.

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.

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.

Services Agreement

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

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

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.

During fiscal 2021, we earned $17 million under the Services Agreement, which was recorded within Net sales.

We expect that services provided under the Services Agreement will wind down at or near the end of the initial term in December 2021.

At that time, we will lose the revenue associated with this agreement, and any fixed or variable costs associated with servicing this agreement not eliminated concurrently with the decline in revenue, would result in decreased operating profit.

Impact of Inflation or Deflation

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We experienced a mix of inflation and deflation across product categories during fiscal 2021 and 2020.

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

In the aggregate across our businesses and taking into account the mix of products, management estimates our businesses experienced cost inflation of approximately one percent in fiscal 2021.

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.

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 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 .

Composition of Consolidated Statements of Operations and Business Performance Assessment

Our net sales consist primarily of product sales of natural, organic, specialty, produce and conventional grocery and non-food products, and support services revenue from 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, 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.

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

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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Operating expenses include salaries and wages, employee benefits, warehousing and delivery, selling, occupancy, insurance, administrative, share-based compensation, depreciation, and amortization expense.

These expenses relate to warehousing and delivery expenses including purchasing, receiving, selecting and outbound transportation expenses.

These expenses include the departmental expenses of warehousing, delivery, purchasing, receiving, selecting and outbound transportation expenses.

Restructuring, acquisition and integration 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.

Integration expenses include certain professional consulting expenses related to business transformation and 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.

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

Net periodic benefit income, excluding service cost

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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 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.

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

We believe Adjusted EBITDA is useful to investors and financial institutions because it provides additional information regarding 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 because of its importance as a measure of underlying operating performance, 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.

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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.

We define Adjusted EBITDA as a consolidated measure inclusive of continuing and discontinued operations results, which we reconcile by adding Net income (loss) from continuing operations, less net income attributable to noncontrolling interests, plus non-operating income and expenses, including Net periodic benefit income, excluding service cost, Interest expense, net and Other, net, plus Provision (benefit) for income taxes and Depreciation and amortization all calculated in accordance with GAAP, plus adjustments for Share-based compensation, Restructuring, acquisition and integration related expenses, Goodwill impairment charges, (Gain) loss on sale of assets, certain legal charges and gains, certain other non-cash charges or other items, as determined by management, plus Adjusted EBITDA of discontinued operations calculated in a manner consistent with the results of continuing operations, outlined above.

The changes to the definition of Adjusted EBITDA from prior periods reflect changes to line item references in our Consolidated Financial Statements, which do not impact the calculation of Adjusted EBITDA.

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)

We have revised the following table for the prior period presentation of two discontinued operations stores moved to continuing operations as discussed in Note 1—Significant Accounting Policies within Part II, Item 8 of this Annual Report.

Increase (Decrease)

(in millions) 2021

Net sales $ 26,950 $ 26,559 $ 22,341 $ 391 $ 4,218

Cost of sales 23,011 22,670 19,121 341 3,549

Gross profit 3,939 3,889 3,220 50 669

Operating expenses 3,593 3,552 2,976 41 576

Goodwill and asset impairment charges

Goodwill impairment charges — 425 293 (425) 132

Restructuring, acquisition and integration related expenses 56 87 148 (31) (61)

Loss (gain) on sale of assets

Operating (loss) income

Other expense (income):

(Gain) loss on sale of assets (4) 18 (1) (22) 19

Operating income (loss) 294 (193) (196) 487 3

Net periodic benefit income, excluding service cost (85) (39) (35) (46) (4)

Interest expense, net 204 192 181 12 11

Total other expense, net

(Loss) income from continuing operations before income taxes

(Benefit) provision for income taxes

Net (loss) income from continuing operations

(Loss) income from discontinued operations, net of tax

Net (loss) income including noncontrolling interests

Other, net (8) (4) (1) (4) (3)

Income (loss) from continuing operations before income taxes 183 (342) (341) 525 (1)

Provision (benefit) for income taxes 34 (91) (59) 125 (32)

Net income (loss) from continuing operations 149 (251) (282) 400 31

Income (loss) from discontinued operations, net of tax 6 (18) (3) 24 (15)

Net income (loss) including noncontrolling interests 155 (269) (285) 424 16

Less net income attributable to noncontrolling interests (6) (5) — (1) (5)

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

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

$ 149 $ (274) $ (285) $ 423 $ 11

Adjusted EBITDA $ 746 $ 673 $ 563 $ 73 $ 110

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

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

(in millions) 2021

Net income (loss) from continuing operations $ 149 $ (251) $ (282)

Adjustments to continuing operations net income (loss):

Less net income attributable to noncontrolling interests (6) (5) —

Total other expense, net

(Benefit) provision for income taxes (1)

Net periodic benefit income, excluding service cost (1)

(85) (39) (35)

Interest expense, net 204 192 181

Other, net (8) (4) (1)

Provision (benefit) for income taxes (2)

Depreciation and amortization 285 282 248

Share-based compensation 49 34 40

Goodwill and asset impairment charges (2)

Goodwill impairment charges (3)

Restructuring, acquisition and integration related expenses (4)

Loss (gain) on sale of assets (4)

(Gain) loss on sale of assets (5)

Multiemployer pension plan withdrawal charges (6)

Notes receivable charges (7)

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Adjusted EBITDA $ 746 $ 673 $ 563

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

Adjustments to discontinued operations net (loss) income:

Total other expense, net

Income (loss) from discontinued operations, net of tax (11)

$ 6 $ (18) $ (3)

Adjustments to discontinued operations net income (loss):

Benefit for income taxes (1) (5) (3)

Other expense

Restructuring, store closure and other charges, net (12)

Adjusted EBITDA of discontinued operations (11)

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.

$ 4 $ 10 $ 22

(1) Fiscal 2021 includes a postretirement settlement gain of $17 million associated with the termination of remaining corporate plans.

Fiscal 2020 includes a lump sum defined benefit pension plan settlement expense of $11 million associated with the acceleration of a portion of the accumulated unrecognized actuarial loss as a result of the lump sum settlement payments.

(2) Fiscal 2020 includes the tax benefit from the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which includes the impact of tax loss carrybacks to 35% tax years allowed under the CARES Act.

(3) 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.

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

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

Refer to Note 6—Goodwill and Intangible Assets, Net in Part II, Item 8 of this Annual Report for additional information.

(4) Fiscal 2021 primarily reflects costs associated with advisory and transformational activities as we position our business for further value-creation post Supervalu acquisition, as well as costs associated with distribution center consolidations.

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.

Refer to Note 4—Restructuring, Acquisition and Integration Related Expenses in Part II, Item 8 of this Annual Report for additional information.

(5) Fiscal 2020 primarily reflects a $50 million accumulated depreciation and amortization charge related to the requirement to move Retail from discontinued operations to continuing operations, partially offset by $32 million of gains on the sale of distribution centers and other assets.

(6) Fiscal 2021 includes charges related to withdrawal liabilities from three Retail multiemployer pension plans.

(7) 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.

(8) 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.

(9) Reflects a charge to settle a legal proceeding and income received to settle a separate legal proceeding.

(10) 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.

(11) We believe the inclusion of discontinued operations results within Adjusted EBITDA provides investors a meaningful measure of performance.

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

Fiscal 2021 also reflects income related to a severance benefit amount.

RESULTS OF OPERATIONS

Fiscal year ended July 31, 2021 (fiscal 2021) compared to fiscal year ended August 1, 2020 (fiscal 2020)

Our net sales by customer channel was as follows (in millions except percentages):

Increase (Decrease)

Customer Channel (1)

Chains $ 12,104 $ 12,010 $ 94 0.8 %

Independent retailers 6,638 6,699 (61) (0.9) %

Supernatural 5,050 4,720 330 7.0 %

Retail 2,442 2,375 67 2.8 %

Other 2,300 2,324 (24) (1.0) %

Eliminations (1,584) (1,569) (15) 1.0 %

Total net sales $ 26,950 $ 26,559 $ 391 1.5 %

(1) Refer to Note 3—Revenue Recognition in Part II, Item 8 of this Annual Report for our channel definitions and for information regarding the recast of sales by customer channel to align with the current period presentation.

Our net sales for fiscal 2021 increased 1.5% from fiscal 2020.

The increase in net sales for fiscal 2021 was primarily driven by strong customer demand in response to the pandemic as well as the benefits from cross selling, which was partially offset by lower sales from certain customers and business lost prior to the pandemic.

Chains net sales increased primarily due to growth in sales to existing customers, including demand for center store and natural products driven by consumers’ response to the pandemic, partially offset by lower sales from certain customers and business lost prior to the pandemic.

Independent retailers net sales decreased primarily due to lower existing store sales driven by a decline in demand for center store and natural products compared to last year's elevated demand due to a strong initial response to the pandemic, and lower sales from certain customers and stores lost prior to the pandemic.

Supernatural net sales increased primarily due to growth in existing store sales related to the pandemic and increased sales to new stores, partially offset by the impact of categories that have been adversely impacted by the pandemic, such as bulk and ingredients used for prepared foods.

Retail’s net sales increased primarily due to a 2.9% increase in identical store sales from higher average basket sizes related to the pandemic.

The increase in Retail sales included the benefit of a 52.3% increase in eCommerce sales at Cub Foods.

Other net sales decreased primarily due to a 20% (or $71 million) decline in sales to food service customers resulting from the lower purchases due to the pandemic and a decrease in military sales, for which we have intentionally resigned certain business, which were partially offset by an increase of $161 million in sales to eCommerce customers.

Eliminations net sales increased primarily due to increased Wholesale sales to Retail.

Cost of Sales and Gross Profit

Our gross profit increased $50 million, or 1.3%, to $3,939 million in fiscal 2021, from $3,889 million in fiscal 2020.

Our gross profit as a percentage of net sales decreased slightly to 14.62% in fiscal 2021 compared to 14.64% in fiscal 2020.

The increase in gross profit dollar growth was primarily driven by higher Wholesale and Retail sales volume.

The slight decrease in gross profit rate included lower Wholesale margin including the mix effect from larger customers, partially offset by an increase due to mix from the Retail segment representing a greater percentage of total net sales and lower levels of promotional activity.

Operating Expenses

Operating expenses increased $41 million, or 1.2%, to $3,593 million, or 13.33% of net sales, in fiscal 2021 compared to $3,552 million, or 13.37% of net sales, in fiscal 2020.

Operating expense in fiscal 2021 included a $63 million Retail multiemployer pension plan withdrawal charge discussed further above.

Operating expenses in fiscal 2020 included $27 million of bad debt expense associated with customer bankruptcies and $20 million of charges and expenses, primarily related to customer notes receivable, surplus property depreciation and a legal reserve charge.

The remaining 10 basis point decrease in operating expenses as a percent of net sales was driven by prior-year pandemic costs, including temporary higher pandemic compensation costs for our front line workers, estimated to be approximately $57 million or 21 basis points, which was partially offset by higher operating costs related to starting up three distribution centers in the Pacific Northwest and our Allentown distribution center during fiscal 2021.

Operating expenses also included share-based compensation expense of $49 million and $34 million for fiscal 2021 and 2020, respectively.

Goodwill Impairment Charges

During fiscal 2020 we recorded $425 million of goodwill and asset impairment charges, which reflected $422 million from an impairment charge on the remaining goodwill attributable to the U.S.

Wholesale reporting unit, $2 million related to purchase accounting adjustments to finalize the opening balance sheet goodwill and $1 million of other asset impairment charges.

Refer to Note 6—Goodwill and Intangible Assets, Net in Part II, Item 8 of this Annual Report for additional information.

Restructuring, Acquisition and Integration Related Expenses

Restructuring, acquisition and integration related expenses were $56 million for fiscal 2021, which included $50 million of integration costs primarily associated with advisory and transformational activities as we position our business for further value creation following the Supervalu acquisition and $6 million of closed property charges.

Expenses for fiscal 2020 were $87 million, which primarily included $42 million of integration related costs, $40 million of closed property reserve charges related to the divestiture of retail banners and $5 million of primarily employee related separation costs.

(Gain) Loss on Sale of Assets

Gain on sale of assets was $4 million in fiscal 2021, which increased $22 million from a loss on sale of assets of $18 million in fiscal 2020.

Loss on sale of assets in fiscal 2020 included an accumulated depreciation and amortization charge of $50 million related to the requirement to move Retail from discontinued operations to continuing operations, which was partially offset by $32 million of gains on the sale of distribution centers and other assets.

Operating Income (Loss)

Reflecting the factors described above, operating income increased $487 million to $294 million for fiscal 2021, from an operating loss of $193 million for fiscal 2020.

The increase in operating income was primarily driven by the fiscal 2020 goodwill impairment charge, an increase in Gross profit and lower Restructuring, acquisition and integration related expenses discussed above, which was partially offset by an increase in Operating expenses.

Net Periodic Benefit Income, Excluding Service Cost

Net periodic benefit income, excluding service cost increased $46 million to $85 million for fiscal 2021, from $39 million in fiscal 2020.

The increase in Net periodic benefit income, excluding service cost was primarily driven by lower interest costs from a lower discount rate utilized in the measurement of pension liabilities, a $17 million settlement gain for the purchase of an irrevocable annuity to settle participant’s post-employment obligations in fiscal 2021, and a lump sum defined benefit pension plan settlement charge of $11 million in fiscal 2020.

Interest Expense, Net

(in millions) 2021

Increase (Decrease)

Interest expense on long-term debt, net of capitalized interest $ 143 $ 166 $ (23)

Interest expense on finance lease obligations 19 12 7

Amortization of financing costs and discounts 13 15 (2)

Loss on debt extinguishment 30 — 30

Interest income (1) (1) —

Interest expense, net $ 204 $ 192 $ 12

The decrease in interest expense on long-term debt for fiscal 2021 compared to fiscal 2020 was primarily driven by lower amounts of outstanding debt.

The increase in interest expense on finance leases in fiscal 2021 primarily reflects interest on a distribution center for which we executed a purchase option with a delayed purchase provision.

The increase in loss on debt extinguishment costs primarily reflects the acceleration of unamortized debt issuance costs and original issue discounts related to mandatory and voluntary prepayments on the Term Loan Facility made in fiscal 2021.

Refer to Note 9—Long-Term Debt in Part II, Item 8 of this Annual Report for further information.

Provision (Benefit) for Income Taxes

The effective income tax rate for continuing operations was an expense of 18.6% compared to a benefit of 26.6% on pre-tax losses for fiscal 2021 and 2020, respectively.

The fiscal 2020 effective tax rate was primarily driven by the impact of non-deductible goodwill impairment charges recorded in fiscal 2020, partially offset by the net operating loss (“NOL”) carryback provisions of the CARES Act.

For fiscal 2021, the effective tax rate was reduced by solar and employment tax credits, including the tax credit impact of a fiscal 2021 investment in an equity method partnership, the recognition of previously unrecognized tax benefits, excess tax deductions attributable to share-based compensation and inventory deductions, as well as the impact of favorable return-to-provision adjustments.

Income (Loss) from Discontinued Operations, Net of Tax

The results of discontinued operations for fiscal 2021 reflect net sales of $42 million for which we recognized $14 million of gross profit and $6 million of Income from discontinued operations, net of tax.

Net sales, gross profit and operating expenses of discontinued operations decreased $142 million, $39 million and $34 million, respectively, for the fiscal 2021 as compared to fiscal 2020 primarily due to a lower operating store base due to closures and sales that occurred in fiscal 2020.

Discontinued operations for fiscal 2020 included $33 million of charges and costs primarily related to store closures charges and expenses, and asset impairment charges related to exited locations.

Refer to Note 18—Discontinued Operations in Part II, Item 8 of this Annual Report for additional information regarding these discontinued operations.

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

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

was $149 million, or $2.48 per diluted common share, for fiscal 2021, compared to a net loss of $274 million, or $5.10 per diluted common share, for fiscal 2020.

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

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

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

The requirement to move two of the four remaining Shoppers stores from discontinued operations to continuing operations in fiscal 2021 required the revision of historical financial information to conform with current period presentation.

As a result, the following results comparison has been updated.

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

Increase (Decrease)

Customer Channel (1)

% of Total Net Sales

Chains $ 12,010 $ 9,769 $ 2,241 22.9 %

Independent retailers 6,699 5,536 1,163 21.0 %

Supernatural 4,720 4,394 326 7.4 %

Retail 2,375 1,687 688 40.8 %

Other 2,324 2,087 237 11.4 %

Eliminations (1,569) (1,132) (437) 38.6 %

Total net sales $ 26,559 $ 22,341 $ 4,218 18.9 %

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.

(1) Refer to Note 3—Revenue Recognition in Part II, Item 8 of this Annual Report for our channel definitions and additional information.

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

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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 $42 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.

The remaining increase of $12 million is primarily due to an increase in eCommerce and other, partially offset by 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.

Eliminations of net sales increased primarily due to $280 million of an incremental 12 weeks of net sales from the acquired Supervalu business and increased Wholesale sales to Retail, which was partially offset by the estimated impact from the 53rd week in fiscal 2019 of $24 million.

Cost of Sales and Gross Profit

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Operating expenses increased $576 million, or 19.4%, to $3,552 million, or 13.37% of net sales, in fiscal 2020 compared to $2,976 million, or 13.32% 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.

The increase in operating expenses as a percentage 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 $65 million from the impact of the additional 53rd week in fiscal 2019.

Goodwill and Asset Impairment Charges

Goodwill Impairment Charges

During fiscal 2020 we recorded $425 million of goodwill and asset impairment charges, which reflects $422 million from an impairment charge on the remaining goodwill attributable to the U.S.

Wholesale reporting unit, $2 million related to purchase accounting adjustments to finalize the opening balance sheet goodwill and $1 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 $293 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.

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Expenses incurred in fiscal 2019 primarily related to $74 million of employee related costs and charges due to severance, settlement of outstanding equity awards and benefits costs, $51 million of other acquisition and integration related costs and $23 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

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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.

The fiscal 2020 and fiscal 2019 operating loss includes $6 million and $10 million, respectively, of operating lease rent expense and $2 million and $4 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

Net periodic benefit income, excluding service cost increased $4 million to $39 million for fiscal 2020, from $35 million in fiscal 2019.

Net periodic benefit income for fiscal 2020 includes $11 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.

Interest Expense, Net

(in millions) 2020

Increase (Decrease)

Interest expense on long-term debt, net of capitalized interest $ 166 $ 147 $ 19

1 unchanged sentence

Amortization of financing costs and discounts 15 13 2

Debt refinancing costs and unamortized financing charges

Loss on debt extinguishment — 5 (5)

Interest income (1) — (1)

Interest expense, net $ 192 $ 181 $ 11

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.

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(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 .

The results of operations for fiscal 2020 reflect net sales of $184 million for which we recognized $53 million of gross profit and a loss from discontinued operations, net of tax of $18 million.

As noted above, pre-tax loss from discontinued operations excludes $6 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.

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Net sales, gross profit and operating expenses of discontinued operations decreased $223 million, $64 million and $55 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

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 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 $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.

The adoption of the LIFO inventory costing method decreased our fiscal 2019 Gross profit by $25.4 million or 11 basis points.

Refer to Note 1—Significant Accounting Policies in Part II, Item 8 of this Annual Report on Form 10-K and below under the heading Net (Loss) Income Attributable to United Natural Foods, Inc.

for additional information regarding the impact of a change in estimate for the gross profit impact of $20.9 million recorded during fiscal 2018.

Operating Expenses

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 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 based on the preliminary fair value of net assets assigned.

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).

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

Based on this decision, coupled with the decline in results in the first half of fiscal 2018 and the future outlook as a result of competitive pressure, the Company determined that both a test for recoverability of long-lived assets and a goodwill impairment analysis should be performed.

The determination of the need for a goodwill analysis was based on the assertion that it was more likely than not that the fair value of the reporting unit was below its carrying amount.

As a result of both these analyses, the Company recorded a total impairment charge of $3.4 million on long-lived assets and $7.9 million to goodwill, respectively, during the second quarter of fiscal 2018.

During the fourth quarter of fiscal 2018 the Company disposed of its Earth Origins retail business.

Restructuring, Acquisition and Integration Related Expenses

Restructuring, acquisition and integration related expenses were $148.2 million for fiscal 2019 and primarily included $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 related to the divestiture of retail banners.

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.

Operating (Loss) Income

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 .

The decrease in operating income was driven by higher Goodwill and asset impairment charges, higher Restructuring, acquisition and integration related expenses, higher Operating expenses, including higher depreciation and amortization expense, and the change in accounting estimate benefit from last year, which were offset in part by higher Gross profit, excluding the change in accounting estimate discussed above.

The fiscal 2019 operating loss includes $9.5 million of operating lease rent expense and $4.2 million 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.

The increase in interest expense on long-term debt was primarily due to an increase in outstanding debt year-over-year driven by Supervalu acquisition financing.

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.

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

(Benefit) Provision for Income Taxes

Our effective income tax rate for continuing operations was 17.1% and 22.5% for fiscal 2019 and 2018 , respectively.

The fiscal 2019 effective tax rate reflects a tax benefit based on a consolidated pre-tax loss from continuing operations while fiscal 2018 reflected a tax expense on pre-tax income.

The fiscal 2018 effective income tax rate was primarily driven by a non-cash net tax benefit of $21.7 million related to the impact of the re-measurement of the U.S.

net deferred tax liabilities due to tax reform.

For fiscal 2019 , the effective income tax rate captures the full impact of the reduced federal tax rate, as well as tax cost associated with stock compensation payments not expected to be deductible in under the Section 162(m) tax reform rules and the impact of non-deductible goodwill impairment charges recorded in fiscal 2019.

Income from Discontinued Operations, Net of Tax

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 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 $24.9 million of restructuring expenses primarily related to employee severance and store closure charges.

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

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 $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 .

of $274 million, or $5.10 per diluted common share, for fiscal 2020, compared to net income of $285 million, or $5.56 per diluted common share, for fiscal 2019.

As described in more detail within Note 12—Share-Based Awards in Part II, Item 8 of this Annual Report, 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.

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.

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 16—Business Segments within Part II, Item 8 of this Annual Report 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)

(in thousands)

(in millions) 2021

Wholesale $ 25,873 $ 25,525 $ 21,551 $ 348 $ 3,974

Retail 2,442 2,375 1,687 67 688

Other 219 228 235 (9) (7)

Eliminations (1,584) (1,569) (1,132) (15) (437)

Total Net sales $ 26,950 $ 26,559 $ 22,341 $ 391 $ 4,218

Continuing operations Adjusted EBITDA:

Wholesale $ 654 $ 593 $ 465 $ 61 $ 128

Retail 96 88 35 8 53

Other (9) (16) 42 7 (58)

Eliminations 1 (2) (1) 3 (1)

Total continuing operations Adjusted EBITDA $ 742 $ 663 $ 541 $ 79 $ 122

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.

Wholesale’s net sales increased in fiscal 2021 as compared to fiscal 2020 primarily due to growth in the Supernatural and Chains channels, which was partially offset primarily by lower sales from the Independent retailers channel.

Refer to the Net Sales discussion above for additional information.

Retail’s net sales increased for fiscal 2021 as compared to fiscal 2020 primarily due to a 2.9% increase in identical store sales from higher average basket sizes related to the pandemic.

Wholesale’s net sales increased in fiscal 2020 as compared to fiscal 2019 driven by an incremental 12 weeks of net sales from the acquired Supervalu business of approximately $3,123 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 .

Retail’s net sales increased for fiscal 2020 as compared to fiscal 2019 primarily due to $495 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.

The increase in net sales eliminations in fiscal 2021 and 2020 was primarily due to an increase in Wholesale sales to our Retail banners, which are eliminated upon consolidation.

Adjusted EBITDA

Wholesale’s Adjusted EBITDA increased 10% in fiscal 2021 as compared to fiscal 2020.

Wholesale’s gross profit dollar growth for fiscal 2021 was $26 million and gross profit rate decreased 7 basis points driven by the mix effect from larger customers.

Wholesale’s operating expense decreased $36 million, which excludes depreciation and amortization, stock-based compensation and other adjustments outlined in Note 16—Business Segments, driven by prior-year pandemic costs, including temporary higher pandemic compensation costs for our front line workers, which was partially offset by higher operating costs related to starting up three distribution centers in the Pacific Northwest and our Allentown distribution center during fiscal 2021.

Wholesale’s depreciation expense decreased $15 million compared to fiscal 2020.

Retail’s Adjusted EBITDA increased 9% in fiscal 2021 as compared to fiscal 2020.

The increase was driven by leveraged sales growth from increases in food-at-home purchases that drove sales at our stores.

Retail’s gross profit dollar growth for fiscal 2021 was $28 million and its gross profit rate increased 41 basis points from lower promotional activity.

Retail’s operating expense, which excludes depreciation and amortization, stock-based compensation and other adjustments as outlined in Note 16—Business Segments, increased $19 million primarily due to higher employee related costs to support higher sales.

Retail’s depreciation and amortization expense increased $25 million compared to fiscal 2020 primarily related to assets previously classified as held for sale that were moved to continuing operations in the fourth quarter of fiscal 2020 for which we were required to begin recording depreciation and amortization expense.

Other Adjusted EBITDA improved 44% in fiscal 2021 primarily due to lower incentive compensation costs.

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.

Gross profit dollar growth for fiscal 2020 was $469 million with a gross profit rate decrease of approximately 8 basis points, which outpaced operating expense increases, which excludes depreciation and amortization, stock-based compensation and other adjustments outlined in Note 16—Business Segments, of $342 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.

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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 .

Gross profit dollar growth for fiscal 2020 was $200 million with gross profit rate increase of approximately 90 basis points from lower promotional activity.

Operating expense growth, which excludes depreciation and amortization, stock-based compensation and other adjustments outlined in Note 16—Business Segments, of $142 million with an operating expense rate decrease of 93 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

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.

• Total liquidity as of July 31, 2021 was $1.32 billion and consisted of the following:

◦ Unused credit under our revolving line of credit was $1,280 million as of July 31, 2021, which increased $45 million from $1,235 million as of August 1, 2020, primarily due to net payments made on the ABL Credit Facility as cash flow generated from the business was utilized to reduce outstanding debt.

This net reduction of the outstanding balance under the ABL Credit Facility in fiscal 2021 was net of incremental borrowings under the facility used to fund certain mandatory and voluntary prepayments on the Term Loan Facility (as discussed below).

◦ Cash and cash equivalents was $41 million as of July 31, 2021, which decreased $6 million from $47 million as of August 1, 2020.

• Our total debt decreased $310 million to $2,188 million as of July 31, 2021 from $2,498 million as of August 1, 2020, primarily driven by net positive cash flows from operating activities and asset dispositions, partially offset by payments for capital expenditures during fiscal 2021.

• In fiscal 2021, we amended our Term Loan Agreement to, among other things, reduce the applicable margin for LIBOR and base rate loans under the Term Loan Facility by 75 basis points.

• In fiscal 2021, we made voluntary prepayments of $186 million on the Term Loan Facility funded with incremental borrowings under the ABL Credit Facility that will reduce our interest costs.

• In fiscal 2021, we issued $500 million of unsecured 6.750% Senior Notes due October 15, 2028 (the “Senior Notes”) and utilized the net proceeds and borrowings under the ABL Credit Facility to make a $500 million prepayment on our Term Loan Facility.

In addition, during fiscal 2021, we made $85 million of additional repayments under the Term Loan Facility, including a mandatory repayment of $72 million related to Excess Cash Flow (as defined in the Term Loan Agreement) generated in fiscal 2020, as required under the Term Loan Agreement and prepayments of $13 million with asset sale proceeds.

• In fiscal 2022, scheduled debt maturities are expected to be $14 million.

We are also obligated to make payments to reduce finance lease obligations, including a payment to acquire the Riverside, CA distribution center in fiscal 2022, which we expect to fund with the proceeds of a concurrent sale-leaseback transaction in fiscal 2022.

Based on our Consolidated First Lien Net Leverage Ratio (as defined in the Term Loan Agreement) at the end of fiscal 2021, no prepayment from Excess Cash Flow in fiscal 2021 is required to be made in fiscal 2022.

• Working capital decreased $272 million to $1,063 million as of July 31, 2021 from $1,335 million as of August 1, 2020, primarily due to the contractual requirement to acquire the Riverside, CA distribution center discussed above reflected in the current portion of finance lease liabilities and accrued expenses, and the collection of tax refunds related to prior year tax returns, partially offset by a reduction of the current portion of long-term debt resulting from the Term Loan Facility Excess Cash Flow prepayment described above.

Sources and Uses of Cash

We expect to continue to replenish operating assets and pay down debt obligations with internally generated funds and sale of surplus and/or non-core assets.

We expect to continue to replenish operating assets and pay down debt obligations with internally generated funds and proceeds from the sale of surplus and/or non-core assets.

A significant reduction in operating earnings or the incurrence of operating losses could have a negative impact on our operating cash flow, which may limit our ability to pay down our outstanding indebtedness as planned.

Our credit facilities are secured by a substantial portion of our total assets.

Our primary sources of liquidity are from internally generated funds and from borrowing capacity under our credit facilities.

Our short-term and long-term financing abilities are believed to be adequate as a supplement to internally generated cash flows to satisfy debt obligations and fund capital expenditures as opportunities arise.

We expect to be able to fund debt maturities through fiscal 2022 with internally generated fund, proceeds from asset sales or borrowings under the ABL Credit Facility.

Our primary sources of liquidity are from internally generated funds and from borrowing capacity under the ABL Credit Facility.

We believe our short-term and long-term financing abilities are adequate as a supplement to internally generated cash flows to satisfy debt obligations and fund capital expenditures as opportunities arise.

Our continued access to short-term and long-term financing through credit markets depends on numerous factors, including the condition of the credit markets and our results of operations, cash flows, financial position and credit ratings.

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We currently do not pay a dividend on our common stock, and have no current plans to do so.

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.

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

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.

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

Long-Term Debt

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 ever less than the greater of (i) $235.0 million and (ii) 10% of the aggregate borrowing base.

During fiscal 2021, we repaid a net $56 million under the ABL Credit Facility, repaid $771 million on the Term Loan Facility related to mandatory and voluntary prepayments, and issued $500 million of Senior Notes.

Refer to Note 9—Long-Term Debt in Part II, Item 8 of this Annual Report for a detailed discussion of the provisions of our credit facilities and certain long-term debt agreements and additional information.

Our Term Loan Agreement and Senior Notes do 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, if the adjusted aggregate availability (as defined in the ABL Loan Agreement) is ever less than the greater of (i) $235 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 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).

The Term Loan Agreement, ABL Loan Agreement and Senior Notes contain certain operational and informational covenants customary for debt securities of these types that limit our and our restricted subsidiaries’ ability to, among other things, incur debt, declare or pay dividends or make other distributions to our stockholders, transfer or sell assets, create liens on our assets, engage in transactions with affiliates, and merge, consolidate or sell all or substantially all of our and our subsidiaries’ assets on a consolidated basis.

We were in compliance with all such covenants for all periods presented.

If we fail to comply with any of these covenants, we may be in default under the applicable debt 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 that may be required from proceeds from sales of mortgaged properties beyond fiscal 2022 (as defined in the Term Loan Agreement).

Based on our Consolidated First Lien Net Leverage Ratio at the end of fiscal 2021, no prepayment from Excess Cash Flow in fiscal 2021 is required to be made in fiscal 2022.

Derivatives and Hedging Activity

We enter into interest rate swap contracts from time to time to mitigate our exposure to changes in market interest rates as part of our overall strategy to manage our debt portfolio to achieve an overall desired position of notional debt amounts subject to fixed and floating interest rates.

We enter into interest rate swap contracts from time to time to mitigate our exposure to changes in market interest rates as part of our strategy to manage our debt portfolio to achieve an overall desired position of notional debt amounts subject to fixed and floating interest rates.

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 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 .

As of July 31, 2021, we had an aggregate of $1,233 million of floating rate notional debt subject to active interest rate swap contracts, which effectively hedge the LIBOR component of our interest rate payments through pay fixed and receive floating interest rate swap agreements.

These fixed rates range from 1.795% to 2.959%, with maturities between August 2022 and October 2025.

The fair value of these interest rate derivatives represents a total net liability of $75 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.

In fiscal 2021, we paid $17 million to terminate or novate $1,204 million of interest rate swap contracts over our floating rate notional debt.

The termination payments reflect the amount of accumulated other comprehensive loss that will continue to be amortized into interest expense over the original interest rate swap contract terms as long as the hedged interest rate transactions are still probable of occurring.

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

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 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.

As of July 31, 2021, we had fixed price fuel contracts outstanding and foreign currency forward agreements outstanding.

Gains and losses and the outstanding assets and liabilities from these arrangements are insignificant.

Payments for Capital Expenditures

Our capital expenditures increased $137 million in fiscal 2021 to $310 million compared to $173 million for fiscal 2020, primarily due to the new Allentown, PA distribution center investment in fiscal 2021 compared to the Riverside, CA distribution center investments in fiscal 2020, as well as higher distribution center improvements, including automation, and higher information technology investments.

Fiscal 2022 capital spending is expected to be approximately $300 million and include projects that optimize and expand our distribution network, technology platform investments and the remaining investments in the Allentown, PA distribution center.

In addition to this fiscal 2022 capital spending, we expect to spend another $152 million to acquire the real property of the Riverside, CA distribution center, which we expect to fund with the proceeds of a concurrent sale-leaseback transaction.

We expect to finance fiscal 2022 capital expenditures requirements with cash generated from operations and borrowings under our ABL Credit Facility.

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.

Future investments may be financed through long-term debt or borrowings under our ABL Credit Facility.

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The following summarizes our Consolidated Statements of Cash Flows:

(in thousands)

Increase (Decrease)

(in millions) 2021

Net cash provided by operating activities of continuing operations $ 614 $ 457 $ 293 $ 157 $ 164

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Effect of exchange rate on cash 1 (1) — 2 (1)

Net increase in cash and cash equivalents

Net (decrease) increase in cash and cash equivalents (6) 2 22 (8) (20)

Cash and cash equivalents, at beginning of period 47 45 23 2 22

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Fiscal 2021 compared to Fiscal 2020

The increase in net cash provided by operating activities of continuing operations was primarily due to lower levels of cash invested in net working capital provided primarily due to the higher use of cash in fiscal 2020 due to credit extended on continued sales growth and build inventories in excess of accounts payable increases.

In addition, we had higher cash flow from pre-tax earnings excluding non-cash impairments, restructuring charges, net periodic benefit income, multiemployer pension plan charges and other expenses, and incurred lower cash interest expense.

The increase in net cash used in investing activities of continuing operations was primarily due to higher payments for capital expenditures discussed below and lower proceeds from asset sales, including from distribution center sales related to optimizing our distribution network, primarily those in the Pacific region.

The decrease in net cash used in financing activities of continuing operations was primarily due to less cash available from operating activities, net of cash used in investing activities, to reduce our outstanding debt.

The decrease in cash flows from discontinued operations was primarily due to higher cash provided by investing activities from the sale of property in fiscal 2020 that did not recur in 2021.

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.

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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 $658 million driven by the repayment of acquired senior notes in fiscal 2019 and $63 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.

Net cash flows from discontinued operations primarily include investing activity cash flows from asset sales and operating activity cash flows 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 $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 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 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.

Accordingly, we have recorded the tax impacts of this treatment (a tax benefit of $0.6 million due to the foreign exchange loss on previously taxed income) in fiscal 2019.

Other Obligations and Commitments

Our principal contractual obligations and commitments consist of obligations under our long term debt, interest on long-term debt, operating and finance leases, purchase obligations, self-insurance liabilities and multiemployer plan withdrawals.

Refer to Note 9—Long-Term Debt, Note 11—Leases, Note 13—Benefit Plans, Note 1—Significant Accounting Policies and Note 17—Commitments, Contingencies and Off-Balance Sheet Arrangements to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report for more information on the nature and timing of obligations for debt, leases, benefit plans, self-insurance and purchase obligations, respectively.

The future amount and timing of interest expense payments are expected to vary with the amount and then prevailing contractual interest rates over our debt as discussed in —Interest Rate Risk within Item 7A of this Annual Report.

Pension and Other Postretirement Benefit Obligations

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In fiscal 2022, 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.

Cash Balance Plan or the SUPERVALU INC.

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

An insignificant amount of contributions are expected to be made to defined benefit pension plans and postretirement benefit plans in fiscal 2022.

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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We assess the relative attractiveness of the use of cash to accelerate contributions considering such factors as expected return on assets, discount rates, cost of debt, reducing or eliminating required Pension Benefit Guaranty Corporation variable rate premiums or in order to achieve exemption from participant notices of underfunding.

Lump Sum Pension Settlement Offering

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.

Off-Balance Sheet Multiemployer Pension Arrangements

We contribute to various multiemployer pension plans under collective bargaining agreements, primarily defined benefit pension plans.

These multiemployer plans generally provide retirement benefits to participants based on their service to contributing employers.

The benefits are paid from assets held in trust for that purpose.

Plan trustees typically are responsible for determining the level of benefits to be provided to participants as well as the investment of the assets and plan administration.

Trustees are appointed in equal number by employers and unions that are parties to the collective bargaining agreement.

Based on the assessment of the most recent information available from the multiemployer plans, we believe that most of the plans to which we contribute are underfunded.

We are only one of a number of employers contributing to these plans and the underfunding is not a direct obligation or liability to us.

Our contributions can fluctuate from year to year due to store closures, employer participation within the respective plans and reductions in headcount.

Our contributions to these plans could increase in the near term.

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 record a withdrawal liability obligation and make withdrawal liability payments to the fund.

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

We made contributions to these plans, and recognized continuing and discontinued operations expense, of $48 million, $52 million and $41 million in fiscal 2021, 2020 and 2019, respectively.

In fiscal 2022, we expect to contribute approximately $46 million to multiemployer plans related to continuing operations, subject to the outcome of collective bargaining and capital market conditions.

We expect required cash payments to fund multiemployer pension plans from which we have withdrawn from to be immaterial in any one fiscal year, which would exclude any payments that may be agreed to on a lump sum basis to satisfy existing withdrawal liabilities.

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

Any triggered withdrawal obligation could result in a material charge and payment obligations that would be required to be made over an extended period of time.

We also make contributions to multiemployer health and welfare plans in amounts set forth in the related collective bargaining agreements.

A small minority of collective bargaining agreements contain reserve requirements that may trigger unanticipated contributions resulting in increased healthcare expenses.

If these healthcare provisions cannot be renegotiated in a manner that reduces the prospective healthcare cost as we intend, our Operating expenses could increase in the future.

Refer to Note 13—Benefit Plans in Part II, Item 8 of this Annual Report for further information regarding the plans in which we participate.

Share Repurchases

On October 6, 2017, we announced that our Board of Directors authorized a share repurchase program for up to $200 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 million.

We did not repurchase any shares of our common stock in fiscal 2021 or 2020 pursuant to the share repurchase program.

As of July 31, 2021, we have $176 million remaining authorized under the share repurchase program.

We do not expect to purchase shares under the share repurchase program during fiscal 2022.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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We evaluate inventory shortages (shrink) throughout each fiscal year based on actual physical counts in our facilities.

Prior to fiscal 2019, we determined inventory cost using the first-in, first-out (“FIFO”) method.

For a substantial portion of legacy Supervalu inventory, cost was determined using the LIFO method, with the rest primarily determined using FIFO.

Inventories acquired as part of the Supervalu acquisition were recorded at their fair market values as of the acquisition date.

During the second quarter of fiscal 2019, we completed our evaluation of our combined inventory accounting policies and changed our method of inventory costing for certain historical United Natural Foods, Inc.

inventory from the FIFO accounting method to the LIFO accounting method.

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 our peer group.

The majority of our inventory is costed under the LIFO method, which allows for 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.

If the first-in, first-out method had been used, Inventories, net, would have been higher by approximately $67 million and $43 million for fiscal 2021 and 2020, 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.

As of July 31, 2021, approximately $1.8 billion or 76 percent of inventory was valued under the LIFO method, before the application of a LIFO reserve, and primarily included grocery, frozen food and general merchandise products, with the remaining inventory valued under the first-in, first-out method and primarily included meat, dairy and deli products.

We receive funds from many of the vendors whose products we buy for resale.

These vendor funds are generally provided to increase the sell-through of the related products.

These vendor funds are generally provided to increase the purchasing and sell-through of the related products.

We receive vendor funds for a variety of merchandising activities:

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However, if such changes were to occur, cost of sales and net sales could change, depending on the specific vendors involved.

If vendor advertising allowances were substantially reduced or eliminated, we would consider changing the volume, type and frequency of the advertising, which could increase or decrease our advertising expense.

Benefit plans

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The determination of our obligation and related expense for Company-sponsored pension and other postretirement benefits is dependent, in part, on management’s selection of certain actuarial assumptions used in calculating these amounts.

These assumptions include, among other things, the discount rate, the expected long-term rate of return on plan assets and the rates of increase in compensation and healthcare costs.

These assumptions include, among other things, the discount rate and the expected long-term rate of return on plan assets.

We measure our defined benefit pension and other postretirement plan obligations as of the nearest calendar month end.

Refer to Note 14—Benefit Plans in Part II, Item 8 of this Annual Report on Form 10-K for information related to the actuarial assumptions used in determining pension and postretirement healthcare liabilities and expenses.

Refer to Note 13—Benefit Plans in Part II, Item 8 of this Annual Report for information related to the actuarial assumptions used in determining pension and postretirement healthcare liabilities and expenses.

Discount rates

We review and select the discount rate to be used in connection with our pension and other postretirement obligations annually.

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We set our rate to reflect the yield of a portfolio of high quality, fixed-income debt instruments that would produce cash flows sufficient in timing and amount to settle projected future benefits.

We utilize the “full yield curve” approach for determining the interest and service cost components of net periodic benefit cost for defined benefit pension and other postretirement benefit plans.

Under this method, the discount rate assumption used in the interest and service cost components of net periodic benefit cost is built through applying the specific spot rates along the yield curve used in the determination of the benefit obligation described above, to the relevant projected future cash flows of our pension and other postretirement benefit plans.

We believe the “full yield curve” approach reflects a greater correlation between projected benefit cash flows and the corresponding yield curve spot rates and provides a more precise measurement of interest and service costs.

Each 25 basis point reduction in the discount rate would increase our projected pension benefit obligation by $62 million, as of July 31, 2021, and for fiscal 2022 would increase Net periodic benefit income by approximately $4 million.

Expected rate of return on plan assets

Our expected long-term rate of return on plan assets assumption is determined based on the portfolio’s actual and target composition, current market conditions, forward-looking return and risk assumptions by asset class, and historical long-term investment performance.

The assumed long-term rate of return on pension assets ranged from 5.00 percent to 5.50 percent for fiscal 2021.

The 10-year rolling average annualized return for a portfolio of investments applied in a manner consistent with our target allocations have generated average returns of approximately 7.10 percent based on returns from 2011 to 2020.

The 10-year rolling average annualized return for the SUPERVALU INC.

Retirement Plan is approximately 8.07 percent based on returns from 2012 to 2021.

In accordance with GAAP, actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, affect expense and obligations in future periods.

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 $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.

Each 25 basis point reduction in expected return on plan assets would decrease Net periodic benefit income for fiscal 2022 by approximately $5 million.

Amortizing gains and losses

We recognize the amortization of net actuarial loss on the SUPERVALU INC.

Retirement Plan and the Unified Grocers, Inc.

Cash Balance Plan over the remaining life expectancy of inactive participants based on our determination that almost all of the defined benefit pension plan participants are inactive and the plan is frozen to new participants.

For the purposes of inactive participants, we utilized an over approximately 90 percent threshold established under our policy.

Business dispositions

The Company reviews the presentation of planned business dispositions in the Consolidated Financial Statements based on the available information and events that have occurred.

The review consists of evaluating whether the business meets the definition of a component for which the operations and cash flows are clearly distinguishable from the other components of the business, and if so, whether it is anticipated that after the disposal the cash flows of the component would be eliminated from continuing operations and whether the disposition represents a strategic shift that has a major effect on operations and financial results.

In addition, the Company evaluates whether the business has met the criteria as a business held for sale.

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.

Operations of the business components meeting the discontinued operations requirements are presented within Income from discontinued operations, net of tax in the Consolidated Statements of Operations, and assets and liabilities of the business component planned to be disposed of are presented as separate lines within the Consolidated Balance Sheets.

The carrying value of the business held for sale is reviewed for recoverability upon meeting the classification requirements.

Evaluating the recoverability of the assets of a business classified as held for sale follows a defined order in which property and intangible assets subject to amortization are considered only after the recoverability of goodwill, indefinite lived intangible assets and other assets are assessed.

After the valuation process is completed, the held for sale business is reported at the lower of its carrying value or fair value less cost to sell, and no additional depreciation or amortization expense is recognized.

Acquired businesses are evaluated for certain criteria to be classified as held for sale, and if so, are reported at their fair value less costs to sell as of the acquisition date and subsequently adjusted each reporting period.

Judgments and estimates utilized to determine whether impairment charges exist include the review of the business units fair value, which may occur under the income and market approaches and include forecasted revenues, operating expenses, income tax expenses, depreciation and amortization expenses and discount rates.

In addition, we evaluate the recognition of other charges and costs, including potential multiemployer plan withdrawal charges.

The sale of a business can result in the recognition of a gain or loss that differs from that anticipated prior to closing.

See Note 19—Discontinued Operations in Part II, Item 8 of this Annual Report on Form 10-K for the carrying value of discontinued operations held for sale assets and liabilities and additional information.

Multiemployer pension plans

We contribute to various multi-employer pension plans based on obligations arising from collective bargaining agreements.

These multi-employer pension plans provide retirement benefits to participants based on their service to contributing employers.

The benefits are paid from assets held in trust for that purpose.

Trustees are typically responsible for determining the level of benefits to be provided to participants as well as such matters as the investment of the assets and the administration of the plans.

We continue to evaluate and address our potential exposure to under-funded multi-employer pension plans as it relates to our associates who are or were beneficiaries of these plans.

In the future, we may consider opportunities to limit the Company’s exposure to under-funded multi-employer pension obligations by moving our active associates in such plans to defined contribution plans, and withdrawing from the pension plan or continuing to participate in the plans for prior obligations.

In fiscal 2021, we incurred a $63 million charge for obligations related to withdrawal liabilities for three Retail multiemployer pension plans where our active associates moved to defined contribution plans for future benefits.

We continue to evaluate our exposure to under-funded multiemployer pension plans.

Although these liabilities are not a direct obligation or an on-balance sheet liability of ours, addressing these uncertainties requires judgment in the timing of expense recognition when we determine our commitment is probable and estimable.

Refer to Note 13—Benefit Plans of this Annual Report for more information relating to our participation in these multiemployer pension plans and to the actuarial assumptions used in determining pension and other postretirement liabilities and expenses.

Self-insurance liabilities

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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 $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

We account for acquired businesses using the purchase method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of the acquisition at their respective estimated fair values.

Goodwill represents the excess of consideration transferred over the fair value of net assets acquired in a business combination.

The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as the estimated useful life of each asset, can materially impact the net income of the periods subsequent to the acquisition through depreciation and amortization, and in certain instances through impairment charges, if the asset becomes impaired in the future.

During the measurement period, purchase price allocation changes that impact the carrying value of goodwill effects any measurement of goodwill impairment that was taken during the time period.

In fiscal 2019, we recorded a goodwill impairment charge related to the Supervalu distribution reporting unit in a period in which the purchase price allocation had not been completed.

Estimates that are sensitive include judgments as to whether information gathered during the measurement period relate to information that was not yet available or whether subsequent developments have occurred that indicate the recognition of other asset and liabilities should be recorded within net income.

In determining the estimated fair value for intangible assets, we typically utilize the income approach, which discounts the projected future net cash flow using an appropriate discount rate that reflects the risks associated with such projected future cash flow.

Estimates that are sensitive to the determination of the fair value of acquired customer intangibles, include forecasted revenues, operating expenses, income tax expenses, depreciation and amortization expenses, and attrition and discount rates, all of which can have a material impact on the estimated fair values of customer relationship intangible assets.

Other significant judgments include the estimated fair value of real and personal property that utilizes significant inputs such as rental and discount rates to determine the fair value of the acquired assets, and the market approach that utilizes significant inputs such as market rental rates and sales comparisons.

Fair value estimates are based on available historical information, future expectations and assumptions determined to be reasonable but are inherently uncertain with respect to future events, including economic conditions, competition, the useful life of the acquired assets and other factors.

Estimates that are sensitive to the determination of the fair value of real and personal property include external transactions and other comparable transactions, estimated replacement and reproduction costs, and estimated useful lives and salvage values.

Determining the useful life of an intangible asset also requires judgment, as different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives.

Intangible assets determined to have an indefinite useful life are reassessed periodically based on the expected use of the asset by us, legal or contractual provisions that may affect the useful life or renewal or extension of the asset’s contractual life without substantial cost, and the effects of demand, competition and other economic factors .

Recoverability of goodwill and intangible assets

We review goodwill for impairment at least annually, and on an interim basis if events occur or circumstances indicate that it is more likely than not that a reporting units’ fair value is below its carrying amount.

We have elected to perform our annual tests for indications of goodwill impairment as of the first day of the fourth quarter of each fiscal year.

We test for goodwill impairment at the reporting unit level, which is at or one level below the operating segment level, unless components are determined to be economically similar, in which case components would be aggregated into goodwill reporting units that are at the same level as an operating segment.

The determination of reporting units considers the quantitative and qualitative characteristics of aggregation of each of the components within the operating segments.

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.

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.

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.

If the qualitative review is bypassed or it is determined that it is more likely than not that the carrying value is greater than the fair value of the reporting unit, a quantitative impairment test must be performed.

The quantitative impairment test determines the fair value of each reporting unit, which is then compared against the carrying amount of the reporting unit, including goodwill, to determine if an impairment exists.

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 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.

In addition, the market approach quantifications included comparable company market multiples relative to each reporting unit.

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

Intangible Assets

We review indefinite lived intangible assets and other long lived assets with finite lives at least annually, and on an interim basis if events occur or circumstances indicate that the carrying value of the respective asset may not be recoverable.

If the evaluation indicates that the carrying amount of the asset may not be recoverable, the potential impairment is measured based on a projected discounted cash flow model.

Impairment is measured as the difference between the fair value of the asset and its carrying value.

Cash flows expected to be generated by the related assets are estimated over the asset’s useful life based on projected cash flows.

Indefinite-lived intangible assets are reviewed for impairment at least annually as of the first day of the fourth fiscal quarter and if events occur or circumstances change that would indicate that the value of the asset may be impaired.

We perform qualitative assessments of goodwill and indefinite lived intangibles assets for impairment, unless we believe it is more likely than not that an intangible asset’s fair value is less than the carrying value, in which case a quantitative assessment would be performed.

Our fiscal 2020 annual indefinite lived impairment assessment indicated that no impairment existed.

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

We review long-lived assets, including definite-lived intangible assets, for indicators of impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable.

Accruals for workers’ compensation, general and automobile liabilities totaled $103 million and $101 million as of July 31, 2021 and August 1, 2020, respectively.

Recoverability of long-lived assets

We review long-lived assets, including definite-lived intangible assets at least annually, and on an interim basis if events occur or changes in circumstances indicate that the carrying value of the assets may not be recoverable.

We evaluate these assets at the asset-group level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.

Cash flows expected to be generated by the related assets are estimated over the assets’ useful lives based on updated projections.

If the evaluation indicates that the carrying amount of an asset may not be recoverable, the potential impairment is measured based using the income approach.

We group long-lived assets with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets.

When the undiscounted future cash flows are not sufficient to recover an asset’s carrying amount, the fair value is compared to the carrying value to determine the loss to be recorded.

Estimates of future cash flows and expected sales prices are judgements based on the Company’s experience and knowledge of operations.

These estimates project cash flows several years into the future and include assumptions on variables such as changes in supply contracts, macroeconomic impacts and market competition.

We did not identify any impairments in fiscal 2021 as part of our quarterly procedures or annual impairment assessment.

The Company accounts for income taxes under the asset and liability method.

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Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized within the provision for income tax in the period that includes the enactment date.

The calculation of the Company’s tax liabilities includes addressing uncertainties in the application of complex tax regulations and is based on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

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however, actual results could differ, and we may be exposed to losses or gains.

Our effective tax rate in a given financial statement period could be affected based on favorable or unfavorable tax settlements.

Our effective tax rate in a given financial statement period could be affected based on favorable or

unfavorable tax settlements.

Unfavorable tax settlements will generally require the use of cash and may result in an increase to our effective tax rate in the period of resolution.

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The Company regularly reviews its deferred tax assets for recoverability to evaluate whether it is more likely than not that they will be realized.

In making this evaluation, the Company considers the statutory recovery periods for the assets, along with available sources of future taxable income, including reversals of existing taxable temporary differences, tax planning strategies, history of taxable income, and projections of future income.

In making this evaluation, the Company considers the statutory recovery periods for the assets, along with available sources of future taxable income, including reversals of existing and future taxable temporary differences, tax planning strategies, history of taxable income and projections of future income.

The Company gives more significance to objectively verifiable evidence, such as the existence of deferred tax liabilities that are forecast to generate taxable income within the relevant carryover periods and a history of earnings.

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.

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

Off-Balance Sheet Arrangements

Guarantees and Contingent Liabilities

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

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

We are also a party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters in the ordinary course of business, which indemnities may be secured by operation of law or otherwise.

Refer to Note 18—Commitments, Contingencies and Off-Balance Sheet Arrangements in Part II, Item 8 of this Annual Report on Form 10-K for further information regarding our outstanding guarantees and contingent liabilities.

Multiemployer Benefit Plans