UNITED NATURAL FOODS INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT This Quarterly Report contains forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act, that involve substantial risks and uncertainties. In some cases you can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek,” “should,” “will,” and “would,” or similar words. Statements that contain these words and other statements that are forward-looking in nature should be read carefully because they discuss future expectations, contain projections of future results of operations or of financial positions or state other “forward-looking” information. Forward-looking statements involve inherent uncertainty and may ultimately prove to be incorrect or false. These statements are based on our management’s beliefs and assumptions, which are based on currently available information. These assumptions could prove inaccurate. You are cautioned not to place undue reliance on forward-looking statements. Except as otherwise may be required by law, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or actual operating results. 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 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; • 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; • increased competition in our industry, including as a result 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-parties to operate, reliable and secure technology systems; • moderated supplier promotional activity, including decreased forward buying opportunities; • 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; • volatility in foreign exchange rates; and • our ability to identify and successfully complete asset or business acquisitions. You should carefully review the risks described under “Part I. Item 1A Risk Factors” of our Annual Report on Form 10-K for the year ended July 31, 2021 (the “Annual Report”) as well as any other cautionary language in this Quarterly Report, as the occurrence of any of these events could have an adverse effect, which may be material, on our business, results of operations, financial condition or cash flows. 25 Table of Contents EXECUTIVE OVERVIEW This Management’s Discussion and Analysis of financial condition and results of operations should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and notes thereto contained in this Quarterly Report on Form 10-Q, the information contained under the caption “Forward-Looking Statements,” and the information in the Annual Report. Business Overview 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; produce; perishables and frozen foods; nutritional supplements and sports nutrition; bulk and food service products; and personal care items. We believe we are North America’s premier wholesaler with 56 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 with 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: Wholesale and Retail; and also includes a manufacturing division and a branded product line division. 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. Item 1. Business” of our Annual Report. Collectively, the actions 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 to be implemented through the end of fiscal 2023. We intend 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 We believe our Fuel the Future strategy 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 recent developments in our relationships with certain large customers. We have 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 27, 2027. 26 Table of Contents 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. We expect that food-at-home expenditures as a percentage of total food expenditures will remain elevated in the near term compared to levels prior to the COVID-19 pandemic, which we refer to as the pandemic. 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. Recently-enacted federal orders require certain employers, including us, to implement a vaccine mandate for employees or require periodic testing for employees who are not vaccinated. On November 4, 2021, the Occupational Safety and Health Administration issued its related regulations for covered employers, including us, which set a January 4, 2022 deadline for compliance, which has subsequently been challenged in the courts and is currently stayed. Such vaccine mandates could result in disruptions to our current and potential future workforce and our vendors’ ability to deliver product and/or maintain pricing, and could impact our ability to supply products to our customers. We are currently evaluating methods of compliance with the mandates, and those efforts could result in increased costs and/or turnover in our workforce. The future impact of the pandemic on our results from changes in the pandemic is uncertain and dependent upon future developments, 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, vaccine mandates 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. 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 experiencing a tighter operating labor market for our warehouse and driver associates, which has caused additional reliance on 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. 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. We seek to obtain security interests and other credit support in connection with the financial accommodations we extend these customers; however, we may incur additional credit or inventory charges related to our customers, as we expect the competitive environment to continue to lead to financial stress on some customers. The magnitude of these risks increases as the size of our Wholesale customers increases. Distribution Center Network Network Optimization and Construction 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 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 in the first half of calendar 2022. In the first quarter of fiscal 2022, we started shipping from our Allentown, PA distribution center with a capacity of 1.3 million square feet that is being utilized to service customers in that geographical area. We incurred and expect to continue to incur initial start-up costs and operating losses in fiscal 2022 as the volume in this facility ramps up to match its expected full operating capacity. 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. 27 Table of Contents 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 equity ownership arrangements. We operate 81 pharmacies primarily within the stores we operate and the stores of our franchisees. In addition, we operate 23 “Cub Wine and Spirit” and “Cub Liquor” stores. In the fourth quarter of fiscal 2021, we determined that the Company no longer met the held for sale criterion for a probable sale to be completed within 12 months for two of the four stores that were previously included within discontinued operations. As a result, we revised the Condensed Consolidated Financial Statements to reclassify two Shoppers stores from discontinued operations to continuing operations. The prior period presented in the Condensed Consolidated Financial Statements have been conformed to the current period presentation. The remaining two stores in discontinued operations were sold subsequent to the end of the first quarter of fiscal 2022. Impact of Inflation We experienced a mix of inflation across product categories during the first quarter of fiscal 2022. In the aggregate across our businesses, including the mix of products, management estimates our business experienced cost inflation of approximately four percent in the first quarter of fiscal 2022. Cost inflation estimates are based on individual like items sold during the periods being compared. Changes in merchandising, customer buying habits and competitive pressures create inherent difficulties in measuring the impact of inflation on Net sales and Gross profit. Absent any changes in units sold or the mix of units sold, inflation generally has the effect of increasing 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 during periods of inflation. Composition of Condensed Consolidated Statements of Operations and Business Performance Assessment Net sales 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 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. Operating expenses Operating expenses include salaries and wages, employee benefits, warehousing and delivery, selling, occupancy, insurance, administrative, share-based compensation, depreciation, and amortization expense. These expenses include 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 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. 28 Table of Contents Interest expense, net 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 Net periodic benefit income, excluding service cost reflects the recognition of expected returns on benefit plan assets and interest costs on plan liabilities. Adjusted EBITDA Our Condensed Consolidated Financial Statements are prepared and presented in accordance with generally accepted accounting principles in the United States (“GAAP”). In addition to the GAAP results, we consider certain non-GAAP financial measures to assess the performance of our business and understand underlying operating performance and core business trends, which we use to facilitate operating performance comparisons of our business on a consistent basis over time. 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 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. Investors are cautioned that there are material limitations associated with the use of non-GAAP financial measures as an analytical tool. Certain adjustments to our GAAP financial measures reflected below exclude items that may be considered recurring in nature and may be reflected in our financial results for the foreseeable future. These measurements and items may be different from non-GAAP financial measures used by other companies. Adjusted EBITDA should be reviewed in conjunction with our results reported in accordance with GAAP in this Quarterly Report. There are significant limitations to using Adjusted EBITDA as a financial measure including, but not limited to, it not reflecting the cost of cash expenditures for capital assets or certain other contractual commitments, 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 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 Condensed Consolidated Financial Statements, which do not impact the calculation of Adjusted EBITDA. 29 Table of Contents 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 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 the Annual Report. 13-Week Period Ended (in millions) October 30, 2021 October 31, 2020 Change Net sales $ 6,997 $ 6,684 $ 313 Cost of sales 5,955 5,714 241 Gross profit 1,042 970 72 Operating expenses 932 904 28 Restructuring, acquisition and integration related expenses 3 16 (13) Operating income 107 50 57 Net periodic benefit income, excluding service cost (10) (17) 7 Interest expense, net 40 69 (29) Other, net 1 (1) 2 Income (loss) from continuing operations before income taxes 76 (1) 77 Benefit for income taxes (1) (1) — Net income from continuing operations 77 — 77 Income from discontinued operations, net of tax — — — Net income including noncontrolling interests 77 — 77 Less net income attributable to noncontrolling interests (1) (1) — Net income (loss) attributable to United Natural Foods, Inc. $ 76 $ (1) $ 77 Adjusted EBITDA $ 189 $ 159 $ 30 30 Table of Contents The following table reconciles Adjusted EBITDA to Net income from continuing operations and to Income from discontinued operations, net of tax. 13-Week Period Ended (in millions) October 30, 2021 October 31, 2020 Net income from continuing operations $ 77 $ — Adjustments to continuing operations net income: Less net income attributable to noncontrolling interests (1) (1) Net periodic benefit income, excluding service cost (10) (17) Interest expense, net 40 69 Other, net 1 (1) Benefit for income taxes (1) (1) Depreciation and amortization 69 77 Share-based compensation 11 14 Restructuring, acquisition and integration related expenses (1) 3 16 Other retail expense (2) — 2 Adjusted EBITDA of continuing operations 189 158 Adjusted EBITDA of discontinued operations (3) — 1 Adjusted EBITDA $ 189 $ 159 Income from discontinued operations, net of tax $ — $ — Adjustments to discontinued operations net income: Provision for income taxes — 1 Adjusted EBITDA of discontinued operations $ — $ 1 (1) Fiscal 2021 primarily reflects costs associated with advisory and transformational activities as we position our business for further value-creation following the Supervalu acquisition. Refer to Note 4—Restructuring, Acquisition and Integration Related Expenses in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information. (2) Reflects expenses associated with event-specific damages to certain retail stores. (3) The last two remaining retail stores of discontinued operations were sold subsequent to the end of the first quarter of fiscal 2022. 31 Table of Contents RESULTS OF OPERATIONS Net Sales Our net sales by customer channel were as follows (in millions except percentages): 13-Week Period Ended Increase (Decrease) Customer Channel (1) October 30, 2021 October 31, 2020 $ % Chains $ 3,082 $ 3,027 $ 55 1.8 % Independent retailers 1,750 1,672 78 4.7 % Supernatural 1,378 1,214 164 13.5 % Retail 602 606 (4) (0.7) % Other 580 581 (1) (0.2) % Eliminations (395) (416) 21 (5.0) % Total net sales $ 6,997 $ 6,684 $ 313 4.7 % (1) Refer to Note 3—Revenue Recognition in Part 1, Item 1 of this Quarterly Report on Form 10-Q for our channel definitions and additional information. Our net sales for the first quarter of fiscal 2022 increased approximately 4.7% from the first quarter of fiscal 2021. The increase in net sales was primarily driven by inflation and new business from both existing and new customers, including the benefit of cross selling, partially offset by supply chain challenges and expected modest market contraction. Chains net sales increased primarily due to growth in sales to existing customers, including an increase from higher product costs. Independent retailers net sales increased primarily due to the beginning of a new supply agreement with a new customer for East Coast locations in the first quarter of fiscal 2022 and growth in sales to existing customers. Supernatural net sales increased primarily due to growth in existing store sales, including the supply of new product categories previously impacted by the pandemic, such as bulk and ingredients used for prepared foods, and increased sales to new stores. Net sales within our Supernatural channel do not include net sales to Amazon.com, Inc. in either the current period or the prior period, as these net sales are reported in our other ch annel. Retail net sales decreased primarily due to a 1.0% decrease in identical store sales from lower transaction counts as a result of cycling strong sales in the first quarter of 2021. Retail identical store sales are defined as net product sales from stores operating since the beginning of the prior-year period, including store expansions and excluding fuel costs and announced planned store dispositions. Identical store sales is a common metric used to understand the sales performance of retail stores as it removes the impact of new and closed stores. Cost of Sales and Gross Profit Our gross profit increased $72 million, or 7.4%, to $1,042 million for the first quarter of fiscal 2022, from $970 million for the first quarter of fiscal 2021. Our gross profit as a percentage of net sales increased to 14.89% for the first quarter of fiscal 2022 compared to 14.51% for the first quarter of fiscal 2021. The increase in gross profit rate was primarily driven by improvements in the Wholesale segment margin rate, including the impact of inflation and the Company’s ValuePath initiative. Retail gross margin rate declined modestly compared to last year. Operating Expenses Operating expenses increased $28 million, or 3.1%, to $932 million, or 13.32% of net sales, for the first quarter of fiscal 2022 compared to $904 million, or 13.52% of net sales, for the first quarter of fiscal 2021. The decrease in operating expenses as a percent of net sales was due to leveraging fixed operating and administrative expenses and lower year-over-year distribution center start-up and consolidation costs, partially offset by higher transportation expenses, the temporary, voluntary closure of a distribution center and the investment in distribution center labor to better support our customers. 32 Table of Contents Restructuring, Acquisition and Integration Related Expenses Restructuring, acquisition and integration related expenses were $3 million for the first quarter of fiscal 2022. Expenses for the first quarter of fiscal 2021 were $16 million, which included $15 million of restructuring and integration costs primarily reflecting costs associated with advisory and transformational activities as we position our business for further value-creation post-acquisition and $1 million of closed property charges and costs. Operating Income Reflecting the factors described above, operating income increased $57 million to $107 million for the first quarter of fiscal 2022, compared to $50 million for the first quarter of fiscal 2021. The operating income increase was primarily driven by an increase in gross profit in excess of an increase in operating expenses as described above. Net Periodic Benefit Income, Excluding Service Cost Net periodic benefit income, excluding service cost decreased $7 million to $10 million for the first quarter of fiscal 2022, from $17 million for the first quarter of fiscal 2021. The decrease in Net periodic benefit income, excluding service cost was primarily driven by lower expected rates of return on plan assets. Interest Expense, Net 13-Week Period Ended (in millions) October 30, 2021 October 31, 2020 Interest expense on long-term debt, net of capitalized interest $ 33 $ 37 Interest expense on finance lease obligations 4 5 Amortization of financing costs and discounts 3 4 Loss on debt extinguishment — 24 Interest income — (1) Interest expense, net $ 40 $ 69 The decrease in interest expense on long-term debt, net of capitalized interest, in the first quarter of fiscal 2022 compared to fiscal 2021 was primarily driven by lower outstanding debt balances. The decrease 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 and expensed financing costs related to the First Term Loan Amendment in the first quarter of fiscal 2021. Refer to Note 8—Long-Term Debt for further information. Benefit for Income Taxes The effective tax rate for the first quarter of fiscal 2022 was a benefit of 1.3% on pre-tax income, primarily driven by discrete tax benefits from employee stock award vestings and the release of uncertain tax positions that occurred in the quarter. 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 $76 million, or $1.25 per diluted common share, for the first quarter of fiscal 2022, compared to a net loss of $1 million, or $0.02 per diluted common share, for the first quarter of fiscal 2021. 33 Table of Contents 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 14—Business Segments within Part I, Item 1 of this Quarterly Report on Form 10-Q 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. 13-Week Period Ended (in millions) October 30, 2021 October 31, 2020 Change Net sales: Wholesale $ 6,734 $ 6,438 $ 296 Retail 602 606 (4) Other 56 56 — Eliminations (395) (416) 21 Total Net sales $ 6,997 $ 6,684 $ 313 Continuing operations Adjusted EBITDA: Wholesale $ 164 $ 123 $ 41 Retail 22 25 (3) Other 4 4 — Eliminations (1) 6 (7) Total continuing operations Adjusted EBITDA $ 189 $ 158 $ 31 Net Sales Wholesale’s net sales increased primarily due to growth in the Supernatural, Independent retailers and Chains channels. Refer to the Net Sales discussion above for additional information. Retail’s net sales decreased primarily due to a 1.0% decrease in identical store sales from lower transaction counts as a result of cycling strong sales in the first quarter of 2021. Adjusted EBITDA Wholesale’s Adjusted EBITDA increased 33.3% for the first quarter of fiscal 2022 as compared to the first quarter of fiscal 2021. The increase was driven by gross margin rate expansion, partially offset by a slight increase in operating expenses. Wholesale’s gross profit dollar growth for the first quarter of fiscal 2022 was $82 million with a gross profit rate increase of approximately 68 basis points primarily driven by margin rate expansion from the benefits of inflation and the Company’s ValuePath initiative. Wholesale’s operating expense increased $41 million, which excludes depreciation and amortization, stock-based compensation and other adjustments as outlined in Note 14—Business Segments. Wholesale’s operating expense rate increased 17 basis points driven by higher transportation expenses and the temporary, voluntary closure of a distribution center and the investment in distribution center labor to better support our customers, partially offset by lower year-over-year distribution center start-up and consolidation costs in fiscal 2021. Wholesale’s depreciation expense decreased $7 million compared to last year. Retail’s Adjusted EBITDA decreased 12.0% for the first quarter of fiscal 2022 from the first quarter of fiscal 2021. The decrease was driven by a lower gross margin rate. Retail operating expenses, which excludes depreciation and amortization, stock-based compensation and other adjustments as outlined in Note 14—Business Segments, was approximately flat. Retail’s depreciation and amortization expense was approximately flat compared to last year. 34 Table of Contents LIQUIDITY AND CAPITAL RESOURCES Highlights • Total liquidity as of October 30, 2021 was $1,112 million and consisted of the following: ◦ Unused credit under our revolving line of credit was $1,066 million, which decreased $214 million from $1,280 million as of July 31, 2021, primarily due to increased cash utilized to fund seasonal working capital increases. ◦ Cash and cash equivalents was $46 million, which increased $5 million from $41 million as of July 31, 2021. • Our total debt increased $202 million to $2,390 million as of October 30, 2021 from $2,188 million as of July 31, 2021, primarily related to additional borrowings under the ABL Credit Facility to fund seasonal working capital increases. • In the remainder of fiscal 2022, scheduled debt maturities are expected to be $11 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 (as defined in the Term Loan Agreement) in fiscal 2021 is required to be made in fiscal 2022. • Subsequent to the end of the first quarter of fiscal 2022, we made a voluntary prepayment of $150 million on the Term Loan Facility funded with incremental borrowings under the ABL Credit Facility that will reduce our interest costs. This prepayment will count towards satisfying any requirement to make a mandatory prepayment with Excess Cash Flow generated during fiscal 2022, if any, which would be due in fiscal 2023. In the second quarter of fiscal 2022, we expect to record an accelerated charge related to deferred financing fees and original issue discounts based on the proportionate amount of this prepayment to the Term Loan Facility balance. Also subsequent to the end of the first quarter of fiscal 2022, we amended our Term Loan Agreement to, reduce the applicable margin for LIBOR and base rate loans under the Term Loan Facility by 25 basis points. • Working capital increased $265 million to $1,328 million as of October 30, 2021 from $1,063 million as of July 31, 2021, primarily due to seasonal increases in inventory and accounts receivable levels, partially offset by an increase in accounts payable related to inventories. Sources and Uses of Cash 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. We expect to be able to fund debt maturities and finance lease liabilities through fiscal 2022 with internally generated funds, 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. Primary uses of cash include debt service, capital expenditures, working capital maintenance and income tax payments. We typically finance working capital needs with cash provided from operating activities and short-term borrowings. Inventories are managed primarily through demand forecasting and replenishing depleted inventories. We currently do not pay a dividend on our common stock, and have no 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, 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. 35 Table of Contents Long-Term Debt During the first quarter of fiscal 2022, we borrowed a net $209 million under the ABL Credit Facility and repaid $8 million on the Term Loan Facility related to voluntary prepayments. Subsequent to the end of the first quarter of fiscal 2022, we repaid an additional $150 million under the Term Loan Facility with borrowings under the ABL Credit Facility. We also entered into a second amendment to the Term Loan Facility to, among other things, reduce the applicable margin by 0.25%. Refer to Note 8—Long-Term Debt in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information, including a detailed discussion of the provisions of our credit facilities and certain long-term debt agreements. 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 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 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 Quarterly Report. 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 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. 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 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 October 30, 2021, we had an aggregate of $1,232 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 $56 million and are subject to volatility based on changes in market interest rates. In the first quarter of fiscal 2021, we paid $11 million to terminate or novate $954 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 7—Derivatives in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information. From time to time, we enter into fixed price fuel supply agreements and foreign currency hedges. As of October 30, 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 for the first quarter of fiscal 2022 were $56 million, compared to $41 million for the first quarter of fiscal 2021, an increase of $15 million primarily due to the new Allentown, PA distribution center investment in the first quarter of fiscal 2022. 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 an incremental $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. Future investments may be financed through long-term debt or borrowings under our ABL Credit Facility. 36 Table of Contents Cash Flow Information The following summarizes our Condensed Consolidated Statements of Cash Flows: 13-Week Period Ended (in millions) October 30, 2021 October 31, 2020 Change Net cash used in operating activities of continuing operations $ (81) $ (55) $ (26) Net cash used in investing activities of continuing operations (81) (37) (44) Net cash provided by financing activities of continuing operations 167 95 72 Net cash used in discontinued operations — (1) 1 Effect of exchange rate on cash — — — Net increase in cash and cash equivalents 5 2 3 Cash and cash equivalents, at beginning of period 41 47 (6) Cash and cash equivalents, at end of period $ 46 $ 49 $ (3) The increase in net cash used in operating activities of continuing operations in the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021 was primarily due to higher levels of cash utilized to build inventories and credit extended through accounts receivable from seasonal working capital changes and continued sales growth, partially offset by an increase in accounts payable related to inventory increases. The increase in net cash used in investing activities of continuing operations in the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021 was primarily due to increased payments for investments and capital expenditures. The increase in net cash provided by financing activities of continuing operations in the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021 was due to a larger increase in net borrowings under the ABL Credit Facility resulting from increases in net cash used in operating activities and investing activities, as described above. Other Obligations and Commitments Except as otherwise disclosed in Note 8—Long-Term Debt in Part I, Item 1 of this Quarterly Report on Form 10-Q, there have been no material changes in the Company’s contractual obligations since the end of fiscal 2021. Refer to Item 7 of the Annual Report for additional information regarding the Company’s contractual obligations. Pension and Other Postretirement Benefit Obligations In fiscal 2022, no minimum pension contributions are required to be made under the Unified Grocers, Inc. 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. We may accelerate contributions or undertake contributions in excess of the minimum requirements from time to time subject to the availability of cash in excess of operating and financing needs or other factors as may be applicable. 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. 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. 37 Table of Contents 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 in fiscal 2021. 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 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 the Annual Report for additional 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 the first quarters of fiscal 2022 and fiscal 2021 pursuant to the share repurchase program. As of October 30, 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 There were no material changes to our critical accounting policies during the period covered by this Quarterly Report on Form 10-Q. Refer to the description of critical accounting policies included in Item 7 of our Annual Report. Seasonality Generally, we do not experience material seasonality. However, our sales and operating results may vary significantly from quarter to quarter due to factors such as changes in our operating expenses, management’s ability to execute our operating and growth strategies, demand for our products, supply shortages and general economic conditions. Our working capital needs are generally greater during the months leading up to high sales periods, such as the build up in inventory during the time period leading to the calendar year-end holidays. Our inventory, accounts payable and accounts receivable levels may be impacted by macroeconomic impacts and changes in food-at-home purchasing rates. These effects can result in normal operating fluctuations in working capital balances, which in turn can result in changes to cash flow from operations that are not necessarily indicative of long-term operating trends.