What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-03-09 compared with 2021-12-08 · 152 added, 110 removed, 291 unchanged (47% of the section changed)

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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.

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 recent developments in our relationships with certain large customers.

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.

Our results are impacted by macroeconomic and demographic trends, 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.

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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.

The pandemic continues to evolve and affect global economies, markets and supply chains.

The continued impact on our results is uncertain and dependent upon future developments, including any resurgence of infection rates and new variants with higher transmissibility, any economic downturn, the availability and efficacy of vaccines and treatments, 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.

We continue to monitor rule making and guidance regarding vaccine and testing mandates, which, if implemented, could result in disruptions to our current and potential future workforce and our vendors’ abilities to deliver product and maintain pricing, could impact our ability to supply products to our customers and could result in increases in costs and turnover in our workforce.

We continue to implement mitigation measures to protect our associates and workplaces, including masks, safety protocols and strongly encouraging vaccinations/boosters.

We are experiencing a tighter operating labor market for our warehouse and driver associates in fiscal 2022 than we have in recent years, 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.

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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.

To support our continued growth within southern California, we began operating a newly leased facility in Riverside, California with approximately 1.2 million square feet upon completion of its construction in the fourth quarter of fiscal 2020.

Subsequent to the end of the second quarter of fiscal 2022, in February 2022, we acquired the real property of this distribution center for approximately $153 million.

Immediately following this acquisition, we monetized this property through a sale-leaseback transaction, pursuant to which we received $225 million in aggregate proceeds for the sale of the property.

Under the terms of the sale-leaseback agreement, we entered into a lease for the distribution center for a term of 15 years.

We expect to record a pre-tax gain on sale of approximately $85 million in the third quarter of fiscal 2022 as a result of the transactions, which primarily reflects the pre-tax net proceeds.

In the first quarter of fiscal 2022, we started shipping from our Allentown, Pennsylvania distribution center, which has a capacity of 1.3 million square feet and is being utilized to service customers in that geographical area.

We incurred and expect to continue to incur start-up costs and operating losses throughout fiscal 2022 as the volume in this facility ramps up to its expected full operating capacity.

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

Retail Operations

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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.

The remaining two stores in discontinued operations were sold in the second 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.

We experienced a mix of inflation across product categories during the second quarter of fiscal 2022.

In the aggregate across our businesses, including the mix of products, management estimates our business experienced cost inflation of approximately five percent in the second quarter of fiscal 2022.

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

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Restructuring, acquisition and integration expenses

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

Restructuring, acquisition and integration expenses reflect expenses resulting from restructuring activities, including severance costs, 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.

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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 ongoing business performance.

Adjusted EBITDA excludes certain items because they are non-cash items or 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.

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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.

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

Assessment of Our Business Results

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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

13-Week Period Ended 26-Week Period Ended

(in millions) January 29, 2022 January 30, 2021 Change January 29, 2022 January 30, 2021 Change

Net sales $ 7,416 $ 6,900 $ 516 $ 14,413 $ 13,584 $ 829

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Restructuring, acquisition and integration related expenses 5 18 (13) 8 34 (26)

Loss on sale of assets 1 — 1 1 — 1

Operating income 125 107 18 232 157 75

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Other, net (2) (2) — (1) (3) 2

Income (loss) from continuing operations before income taxes 76 (1) 77

Benefit for income taxes (1) (1) —

Income from continuing operations before income taxes 93 75 18 169 74 95

Provision for income taxes 25 17 8 24 16 8

Net income from continuing operations 68 58 10 145 58 87

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Less net income attributable to noncontrolling interests (2) (2) — (3) (3) —

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

Net income attributable to United Natural Foods, Inc.

$ 66 $ 59 $ 7 $ 142 $ 58 $ 84

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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

13-Week Period Ended 26-Week Period Ended

(in millions) January 29, 2022 January 30, 2021 January 29, 2022 January 30, 2021

Net income from continuing operations $ 68 $ 58 $ 145 $ 58

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Net periodic benefit income, excluding service cost

(10) (17) (20) (34)

Interest expense, net 44 51 84 120

Other, net (2) (2) (1) (3)

Benefit for income taxes (1) (1)

Provision for income taxes 25 17 24 16

Depreciation and amortization 69 67 138 144

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Restructuring, acquisition and integration related expenses (1)

Other retail expense (2)

Loss on sale of assets 1 — 1 —

Multi-employer pension plan withdrawal benefit (2)

Other retail (benefit) expense (3)

Adjusted EBITDA of continuing operations 201 204 390 362

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Adjustments to discontinued operations net income:

Provision for income taxes — 1

Benefit for income taxes — (2) — (1)

Restructuring, store closure and other charges, net

Adjusted EBITDA of discontinued operations

$ — $ 2 $ — $ 3

(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.

(2) Reflects an adjustment to multi-employer withdrawal charge estimates.

(3) Reflects expenses associated with event-specific damages to certain retail stores and store closure costs.

(4) The last two remaining retail stores in discontinued operations were sold in the second quarter of fiscal 2022.

RESULTS OF OPERATIONS

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13-Week Period Ended

Increase (Decrease) 26-Week Period Ended

Increase (Decrease)

Customer Channel (1)

2021 October 31,

2022 January 30,

2021 $ % January 29,

2022 January 30,

Chains $ 3,243 $ 3,106 $ 137 4.4 % $ 6,325 $ 6,133 $ 192 3.1 %

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(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.

Second Quarter

Our net sales for the second quarter of fiscal 2022 increased approximately 7.5% from the second quarter of fiscal 2021.

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.

Independent retailers net sales increased primarily due to sales under a new supply agreement with a new customer for East Coast locations in the first quarter of fiscal 2022.

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.

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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 net sales increased primarily due to a 2.1% increase in identical store sales from higher average basket sizes.

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.

Our net sales for fiscal 2022 year-to-date increased approximately 6.1% from fiscal 2021 year-to-date.

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 sales under a new supply agreement with a new customer for East Coast locations in the first quarter of fiscal 2022.

Retail net sales increased primarily due to a 0.3% increase in identical store sales from higher average basket sizes.

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.

Our gross profit increased $80 million, or 8.0%, to $1,075 million for the second quarter of fiscal 2022, from $995 million for the second quarter of fiscal 2021.

Our gross profit as a percentage of net sales increased to 14.50% for the second quarter of fiscal 2022 compared to 14.42% for the second 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, partially offset by changes in customer mix and a higher LIFO charge.

Retail gross margin rate increased modestly compared to last year.

Our gross profit increased $152 million, or 7.7%, to $2,117 million for fiscal 2022 year-to-date, from $1,965 million for fiscal 2021 year-to-date.

Our gross profit as a percentage of net sales increased to 14.69% for fiscal 2022 year-to-date compared to 14.47% for fiscal 2021 year-to-date.

The increase in gross profit rate was driven by improvements in the Wholesale segment margin rate, including the impact of inflation and the Company’s ValuePath initiative, partially offset by changes in customer mix and a higher LIFO charge.

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.

Operating expenses increased $74 million, or 8.5%, to $944 million, or 12.73% of net sales, for the second quarter of fiscal 2022 compared to $870 million, or 12.61% of net sales, for the second quarter of fiscal 2021.

The increase in operating expenses as a percent of net sales resulted from prioritizing customer service investments in a complex operating environment which led to approximately 60 basis points of higher transportation and distribution center labor costs in the second quarter of fiscal 2022, which were partially offset by leveraging fixed costs.

The second quarter of fiscal 2021 included lower benefit costs.

Operating expenses increased $102 million, or 5.7%, to $1,876 million, or 13.02% of net sales, for fiscal 2022 year-to-date compared to $1,774 million, or 13.06% of net sales, for fiscal 2021 year-to-date.

The decrease in operating expenses as a percent of net sales was due to leveraging fixed expenses and lower year-over-year distribution center start-up and consolidation costs, partially offset by prioritizing customer service investments in a complex operating environment which led to higher transportation expenses and distribution labor costs in fiscal 2022 year-to-date, and the temporary, voluntary closure of a distribution center.

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.

Restructuring, acquisition and integration related expenses were $5 million for the second quarter of fiscal 2022.

Expenses for the second quarter of fiscal 2021 were $18 million, which included $14 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 Supervalu acquisition and $4 million of closed property charges and costs.

Restructuring, acquisition and integration related expenses were $8 million for fiscal 2022 year-to-date.

Expenses for fiscal 2021 year-to-date were $34 million, which included $29 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 Supervalu acquisition and $5 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.

Reflecting the factors described above, operating income increased $18 million to $125 million for the second quarter of fiscal 2022, compared to $107 million for the second quarter of fiscal 2021.

The increase in operating income was primarily driven by an increase in gross profit, lower restructuring, acquisition and integration expenses, partially offset by an increase in operating expenses as described above.

Reflecting the factors described above, operating income increased $75 million, to $232 million for fiscal 2022 year-to-date, from an operating loss of $157 million for fiscal 2021 year-to-date.

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.

Net periodic benefit income, excluding service cost decreased $7 million to $10 million for the second quarter of fiscal 2022, from $17 million for the second quarter of fiscal 2021.

Net periodic benefit income, excluding service cost decreased $14 million to $20 million for fiscal 2022 year-to-date, from $34 million for fiscal 2021 year-to-date.

The decrease in Net periodic benefit income, excluding service cost for the second quarter and fiscal 2022 year-to-date as compared to the respective comparative periods 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

13-Week Period Ended 26-Week Period Ended

(in millions) January 29, 2022 January 30, 2021 January 29, 2022 January 30, 2021

Interest expense on long-term debt, net of capitalized interest $ 30 $ 38 $ 63 $ 75

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Interest expense, net $ 44 $ 51 $ 84 $ 120

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.

The decrease in interest expense on long-term debt, net of capitalized interest, in the second quarter of fiscal 2022 compared to the second quarter of fiscal 2021 and in fiscal 2022 year-to-date compared to fiscal 2021 year-to-date was primarily driven by lower outstanding debt balances and lower average interest rates.

The decrease in loss on debt extinguishment costs in fiscal 2022 year-to-date compared to fiscal 2021 year-to-date primarily reflects the acceleration of unamortized debt issuance costs and original issue discounts related to higher mandatory and voluntary prepayments on the Term Loan Facility made in fiscal 2021 year-to-date.

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.

Provision for Income Taxes

The effective tax rate for the second quarter of fiscal 2022 was 26.9% compared to 22.7% for the second quarter of fiscal 2021.

The change in the effective tax rate was primarily driven by a tax benefit in the second quarter of fiscal 2021 from the release of reserves for unrecognized tax positions.

The effective tax rate for fiscal 2022 year-to-date was 14.2% compared to 21.6% for fiscal 2021 year-to-date primarily driven by discrete tax benefits from employee stock award vestings that occurred in fiscal 2022 year-to-date.

The impacts from the release of unrecognized tax positions in fiscal 2022 year-to-date were comparable to fiscal 2021 year-to-date.

Net Income 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.

was $66 million, or $1.08 per diluted common share, for the second quarter of fiscal 2022, compared to $59 million, or $1.00 per diluted common share, for the second quarter of fiscal 2021.

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

was $142 million, or $2.33 per diluted common share, for fiscal 2022 year-to-date, compared to $58 million, or $0.98 per diluted common share, for fiscal 2021 year-to-date.

Segment Results of Operations

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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

13-Week Period Ended 26-Week Period Ended

(in millions) January 29, 2022 January 30, 2021 Change January 29, 2022 January 30, 2021 Change

Wholesale $ 7,132 $ 6,618 $ 514 $ 13,866 $ 13,056 $ 810

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Retail 30 26 4 52 51 1

Other 12 (8) 20 16 (4) 20

Eliminations — (2) 2 (1) 4 (5)

Total continuing operations Adjusted EBITDA $ 201 $ 204 $ (3) $ 390 $ 362 $ 28

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.

Second Quarter

Wholesale’s net sales increased primarily due to growth in the Independent retailers, Supernatural and Chains channels, as discussed in the Net Sales section above.

Retail’s net sales increased primarily due to a 2.1% increase in identical store sales from higher average basket sizes.

Wholesale’s net sales increased primarily due to growth in sales to existing customers in the Supernatural, Independent retailers and Chains, as discussed in the Net Sales section above.

Retail’s net sales increased primarily due to a 0.3% increase in identical store sales from higher average basket sizes.

The decrease in eliminations net sales was driven by lower Wholesale sales to Retail to support Retail’s continued sales growth.

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.

Second Quarter

Wholesale’s Adjusted EBITDA decreased 15.4% for the second quarter of fiscal 2022 as compared to the second quarter of fiscal 2021.

The decrease was driven by decisions to invest in operations that drove higher expenses in excess of margin growth from higher sales.

Wholesale’s gross profit dollars increased for the second quarter of fiscal 2022 was $80 million with a gross profit rate increase of approximately 24 basis points primarily driven by margin rate expansion from the benefits of inflation and the Company’s ValuePath initiative, which was partially offset by changes in customer mix and a higher LIFO charge.

Wholesale’s operating expense increased $110 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.

Wholesale’s operating expense rate increased 85 basis points driven by the decision to invest in higher transportation expenses and distribution center labor to better support our customers in this year’s second quarter, and lower benefit costs in last year’s second quarter, partially offset by leveraging fixed expenses.

Wholesale’s depreciation expense increased $2 million compared to last year.

Retail’s Adjusted EBITDA increased 15.4% for the second quarter of fiscal 2022 from the second quarter of fiscal 2021.

The increase was driven by a slightly higher 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.

Wholesale’s Adjusted EBITDA increased 3.9% for fiscal 2022 year-to-date from fiscal 2021 year-to-date.

The increase was driven by leveraged sales growth, which was partially offset by higher operating costs.

Gross profit dollar growth for fiscal 2022 year-to-date was $162 million and gross profit rate increased 46 basis points driven by margin rate expansion from the benefits of inflation and the Company’s ValuePath initiative, which was partially offset by changes in customer mix and a higher LIFO charge.

Wholesale’s operating expense increased $151 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 51 basis points primarily driven by the decision to invest in higher transportation expenses and distribution labor to better support our customers in fiscal 2022 year-to-date, and the temporary, voluntary closure of a distribution center, partially offset by leveraging fixed expenses and lower year-over-year distribution center start-up and consolidation costs.

Wholesale depreciation expense decreased $5 million.

Retail’s Adjusted EBITDA increased 2.0% for fiscal 2022 year-to-date from fiscal 2021 year-to-date.

LIQUIDITY AND CAPITAL RESOURCES

• 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.

• Total liquidity as of January 29, 2022 was $1,036 million and consisted of the following:

◦ Unused credit under our revolving line of credit was $991 million, which decreased $289 million from $1,280 million as of July 31, 2021, primarily due to increased cash utilized to fund working capital increases and a voluntary prepayment on the Term Loan Facility described below.

◦ Cash and cash equivalents was $45 million, which increased $4 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.

• Our total debt increased $135 million to $2,323 million as of January 29, 2022 from $2,188 million as of July 31, 2021, primarily related to additional borrowings under the $2,100 million asset-based revolving credit facility (the “ABL Credit Facility”) entered into on August 30, 2018, as amended, to fund working capital increases.

• Working capital increased $246 million to $1,309 million as of January 29, 2022 from $1,063 million as of July 31, 2021, primarily due to increases in inventory and accounts receivable levels related to new customers and sales growth of existing customers, partially offset by an increase in accounts payable related to inventories.

In the remainder of fiscal 2022, scheduled debt maturities are expected to be $7 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.

• In the second quarter of fiscal 2022, we made a voluntary prepayment of $150 million on the term loan agreement (the “Term Loan Agreement”) related to our $1,950.0 million term loan facility (the “Term Loan Facility”) entered into in October 2018, as amended, funded with incremental borrowings under the ABL Credit Facility that will reduced our interest costs.

This prepayment will count towards satisfying any requirement to make a mandatory prepayment with Excess Cash Flow (as defined in the Term Loan Agreement) generated during fiscal 2022, if any, which would be due in fiscal 2023.

Also in the second 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.

• Subsequent to the end of the second quarter fiscal 2022, we paid $153 million to acquire the Riverside, California distribution center, which reduced our Current portion of long-term debt and finance lease liabilities by $96 million with the remainder primarily reducing our Accrued expenses and other current liabilities.

Immediately following this acquisition, we monetized this property through a sale-leaseback transaction, pursuant to which we received $225 million in aggregate proceeds for the sale of the property.

In March 2022, we made a $44 million voluntary prepayment on the Term Loan Facility from the majority of the anticipated after-tax net proceeds from the transactions.

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.

We expect to continue to replenish operating assets and pay down debt obligations with internally generated funds.

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.

12 unchanged sentences

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%.

During fiscal 2022 year-to-date, we borrowed a net $289 million under the ABL Credit Facility and repaid $158 million on the Term Loan Facility related to voluntary prepayments.

We 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 Term Loan Agreement and the indenture governing our unsecured 6.75% Senior Notes due October 15, 2028 (the “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.

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.

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

As of 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.

As of January 29, 2022, we had an aggregate of $1,231 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 $39 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.

In fiscal 2021 year-to-date, 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.

1 unchanged sentence

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.

As of January 29, 2022, 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.

Our capital expenditures for fiscal 2022 year-to-date were $106 million, compared to $92 million for fiscal 2021 year-to-date, an increase of $14 million, primarily due investments in our new Allentown, Pennsylvania distribution center in fiscal 2022 year-to-date.

Fiscal 2022 capital spending is expected to be approximately $250 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.

4 unchanged sentences

26-Week Period Ended

(in millions) October 30, 2021 October 31, 2020 Change

Net cash used in operating activities of continuing operations

(in millions) January 29, 2022 January 30, 2021 Change

Net cash provided by operating activities of continuing operations

$ 43 $ 207 $ (164)

1 unchanged sentence

(129) (51) (78)

Net cash provided by financing activities of continuing operations

Net cash used in discontinued operations

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

Net cash provided by discontinued operations — 1 (1)

Effect of exchange rate on cash — — —

Net increase in cash and cash equivalents 5 2 3

Net increase (decrease) in cash and cash equivalents 5 (6) 11

Cash and cash equivalents, at beginning of period 40 47 (7)

Cash and cash equivalents, at end of period $ 45 $ 41 $ 4

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.

The decrease in net cash provided by operating activities of continuing operations in fiscal 2022 year-to-date compared to fiscal 2021 year-to-date was primarily due to higher levels of cash utilized to build inventories driven by supplier limitations and credit extended through accounts receivable driven by new customers and continued sales growth, partially offset by an increase in cash provided from higher accounts payable related to inventory increases.

The increase in net cash used in investing activities of continuing operations in fiscal 2022 year-to-date compared to fiscal 2021 year-to-date was primarily due to lower proceeds from asset sales, and increased payments for investments and capital expenditures.

The increase in net cash provided by (used in) financing activities of continuing operations in fiscal 2022 year-to-date compared to fiscal 2021 year-to-date was due to an increase in net borrowings 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.

Except as otherwise disclosed in Note 8—Long-Term Debt and Note 16—Subsequent Events 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.

As described in further detail in Note 11—Benefit Plans, in the second quarter of fiscal 2022, we merged the Unified Grocers, Inc.

Cash Balance Plan into the SUPERVALU INC.

Retirement Plan.

In fiscal 2022, no minimum pension contributions were required to be made under the previous Unified Grocers, Inc.

Cash Balance Plan or are required under the SUPERVALU INC.

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

28 unchanged sentences

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 did not repurchase any shares of our common stock in fiscal 2022 year-to-date or fiscal 2021 year-to-date pursuant to the share repurchase program.

As of January 29, 2022, 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.

9 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis