What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-06-07 compared with 2022-03-09 · 148 added, 111 removed, 332 unchanged (44% of the section changed)

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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 are a coast-to-coast distributor with customers in all 50 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.

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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.

We introduced our Fuel the Future strategy with the mission of helping to make 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.

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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.

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

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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 continue to implement mitigation measures to protect our associates and workplaces, including 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.

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

We continue to take 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.

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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, 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.

We incurred start-up costs and operating losses, and expect to continue to incur operating losses for 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 expect to 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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Impact of Inflation

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.

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

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

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

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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.

Our pricing to our customers is determined at the time of sale primarily based on the then prevailing vendor listed base cost, and include discounts we offer to our customers.

Generally in an inflationary environment as a wholesaler, rising vendor costs result in higher Net sales driven by higher vendor prices when other variables such as quantities sold and vendor promotions are constant.

Composition of Condensed Consolidated Statements of Operations and Business Performance Assessment

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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.

Operating expenses include distribution expenses of warehousing, delivery, purchasing, receiving, selecting, and outbound transportation expenses, and selling and administrative expenses.

These expenses include salaries and wages, employee benefits, occupancy, insurance, depreciation and amortization expense and share-based compensation expense.

Restructuring, 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.

Restructuring, acquisition and integration expenses reflect expenses resulting from restructuring activities, including severance costs, facility closure asset impairment charges and costs, share-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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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-year periods reflect changes to line item references in our Condensed Consolidated Financial Statements, which do not impact the calculation of Adjusted EBITDA.

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, non-cash LIFO charge or benefit, 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.

During the third quarter of fiscal 2022, the Company revised its definition of Adjusted EBITDA to exclude the impact of the non-cash LIFO charge or benefit.

The Company believes that this change provides a better indicator of its underlying operating performance and permits better comparability between periods.

Refer to footnote one in the table below and Note 14—Business Segments in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information regarding the impact of the change in definition of Adjusted EBITDA.

In the fourth quarter of fiscal 2021, we made changes to line item references in our Condensed Consolidated Financial Statements, for which the definition and reconciliation of Adjusted EBITDA has been recast for consistency, such that all periods presented reflect the same reconciliation.

This change in the fourth quarter of fiscal 2021 did not impact the calculation of Adjusted EBITDA.

Assessment of Our Business Results

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

We have revised the following table for the 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.

We have revised the following tables 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 and with respect to Adjusted EBITDA for prior period presentation of the change in segment profit measurement discussed in Note 14—Business Segments within Part I, Item 1 of this Quarterly Report on Form 10-Q.

13-Week Period Ended 39-Week Period Ended

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

(in millions) April 30, 2022 May 1, 2021 Change April 30, 2022 May 1, 2021 Change

Net sales $ 7,242 $ 6,631 $ 611 $ 21,655 $ 20,215 $ 1,440

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Restructuring, acquisition and integration related expenses 8 10 (2) 16 44 (28)

Loss on sale of assets 1 — 1 1 — 1

Gain on sale of assets (88) — (88) (87) — (87)

Operating income 123 92 31 355 249 106

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13-Week Period Ended 39-Week Period Ended

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

(in millions) April 30, 2022 May 1, 2021 April 30, 2022 May 1, 2021

Net income from continuing operations $ 68 $ 50 $ 213 $ 108

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Share-based compensation 10 11 33 38

LIFO charge (1)

Restructuring, acquisition and integration related expenses (2)

Loss on sale of assets 1 — 1 —

Gain on sale of assets (3)

(88) — (87) —

Multi-employer pension plan withdrawal benefit (4)

Other retail (benefit) expense (3)

Other retail expense (5)

Adjusted EBITDA of continuing operations 196 184 616 560

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Adjustments to discontinued operations net income:

Benefit for income taxes — (2) — (1)

Provision for income taxes — 1 — —

Restructuring, store closure and other charges, net

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$ — $ 1 $ — $ 4

(1) During the third quarter of fiscal 2022, the Company revised its definition of Adjusted EBITDA to exclude the impact of the non-cash LIFO charge or benefit.

The following illustrates the impact of the revised definition on previously reported periods to show the effect of this change:

13-Week Period Ended 39-Week Period Ended

(in millions) May 1, 2021 May 1, 2021

Adjusted EBITDA of continuing operations (previously reported definition) $ 179 $ 541

LIFO Charge 5 19

Adjusted EBITDA of continuing operations (revised definition) 184 560

Adjusted EBITDA of discontinued operations 1 4

Adjusted EBITDA (revised definition) $ 185 $ 564

(2) 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.

(3) Fiscal 2022 primarily reflects the gain on sale of our Riverside, California distribution center in the third quarter of fiscal 2022.

Refer to the gain on sale of assets discussion below for additional information.

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

(5) 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.

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

RESULTS OF OPERATIONS

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Customer Channel (1)

2022 January 30,

2021 $ % January 29,

2022 January 30,

2021 $ % April 30,

Chains $ 3,111 $ 2,957 $ 154 5.2 % $ 9,436 $ 9,090 $ 346 3.8 %

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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.

Second Quarter

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

Third Quarter

Our net sales for the third quarter of fiscal 2022 increased approximately 9.2% from the third 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 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 sales under a new supply agreement with a new customer for East Coast locations in the first quarter of fiscal 2022.

Chains net sales increased primarily due to growth in sales to existing customers, including an increase from higher product costs, which drove higher wholesale selling prices to our customers.

Independent retailers net sales increased primarily due to sales under a new supply agreement with a new customer for East Coast locations commencing in the first quarter of fiscal 2022 and growth in sales to existing customers, including an increase from higher product costs, which drove higher wholesale selling prices to our 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.

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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.

Chains net sales increased primarily due to growth in sales to existing customers, including an increase from higher product costs, which drove higher wholesale selling prices to our customers.

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Cost of Sales and Gross Profit

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 $42 million, or 4.3%, to $1,012 million for the third quarter of fiscal 2022, from $970 million for the third quarter of fiscal 2021.

Our gross profit as a percentage of net sales decreased to 14.0% for the third quarter of fiscal 2022 compared to 14.6% for the third quarter of fiscal 2021.

The LIFO charge was $72 million and $5 million in the third quarter of fiscal 2022 and 2021, respectively.

E xcluding the non-cash LIFO charge, gross margin rate was 15.0% of net sales and 14.7% of net sales for the third quarter of fiscal 2022 and 2021, respectively.

The increase in gross margin rate, excluding the LIFO charge, 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.

Our gross profit increased $194 million, or 6.6%, to $3,129 million for fiscal 2022 year-to-date, from $2,935 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.

Our gross profit as a percentage of net sales decreased to 14.4% for fiscal 2022 year-to-date compared to 14.5% for fiscal 2021 year-to-date.

The LIFO charge was $102 million and $19 million for fiscal 2022 year-to-date and for fiscal 2021 year-to-date, respectively.

E xcluding the non-cash LIFO charge, gross margin rate was 14.9% of net sales and 14.6% of net sales for fiscal 2022 year-to-date and fiscal 2021 year-to-date, respectively.

Operating Expenses

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 $101 million, or 11.6%, to $969 million, or 13.4% of net sales, for the third quarter of fiscal 2022 compared to $868 million, or 13.1% of net sales, for the third quarter of fiscal 2021.

The increase in operating expenses as a percent of net sales resulted from continued investments in servicing our customers, which led to approximately 50 basis points of higher transportation and distribution center labor costs in the third quarter of fiscal 2022, and occupancy-related inflation, which were partially offset by leveraging fixed costs and benefits of the Company’s ValuePath initiative.

Operating expenses increased $203 million, or 7.7%, to $2,845 million, or 13.1% of net sales, for fiscal 2022 year-to-date compared to $2,642 million, or 13.1% 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.

Operating expenses were approximately flat as a percent of net sales.

Changes in operating expenses as a percentage of net sales included continued investments in servicing our customers, which led to approximately 50 basis points of higher transportation expenses and distribution labor costs in fiscal 2022 year-to-date, occupancy-related inflation, and the temporary, voluntary closure of a distribution center in the first quarter of fiscal 2022.

These increases were partially offset by leveraging fixed expenses and lower year-over-year distribution center start-up and consolidation costs.

Restructuring, Acquisition and Integration Related Expenses

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 the third quarter of fiscal 2022 and $10 million for the third quarter of fiscal 2021.

Restructuring, acquisition and integration related expenses were $16 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.

Expenses for fiscal 2021 year-to-date were $44 million, which included $41 million of restructuring and integration costs primarily reflecting costs associated with advisory and transformational activities as we position our business for further value creation following the Supervalu acquisition and $3 million of closed property charges and costs.

Gain on Sale of Assets

During the third quarter of fiscal 2022, we acquired the real property of our Riverside, California 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, which represented the fair value 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 recorded a pre-tax gain on sale of approximately $87 million in the third quarter of fiscal 2022 as a result of the transactions, which primarily reflects the pre-tax net proceeds.

Operating Income

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.

Reflecting the factors described above, operating income increased $31 million to $123 million for the third quarter of fiscal 2022, compared to $92 million for the third quarter of fiscal 2021.

The increase in operating income was primarily driven by an increase in gain on sale of assets and gross profit, partially offset by an increase in operating expenses, all of which are described above.

Reflecting the factors described above, operating income increased $106 million to $355 million for fiscal 2022 year-to-date, from operating income of $249 million for fiscal 2021 year-to-date.

The increase in operating income was primarily driven by an increase in gross profit and gain on sale of assets, and lower restructuring, acquisition and integration expenses, partially offset by an increase in operating expenses, all of which are described above.

Net Periodic Benefit Income, Excluding Service Cost

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 $7 million to $10 million for the third quarter of fiscal 2022, from $17 million for the third quarter of fiscal 2021.

Net periodic benefit income, excluding service cost decreased $21 million to $30 million for fiscal 2022 year-to-date, from $51 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.

The decrease in Net periodic benefit income, excluding service cost for the third 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 driven by a higher target investment allocation to fixed income assets.

Interest Expense, Net

13-Week Period Ended 39-Week Period Ended

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

(in millions) April 30, 2022 May 1, 2021 April 30, 2022 May 1, 2021

Interest expense on long-term debt, net of capitalized interest $ 32 $ 35 $ 95 $ 110

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Interest expense, net $ 37 $ 44 $ 121 $ 164

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 interest expense on long-term debt, net of capitalized interest, in the third quarter of fiscal 2022 compared to the third 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.

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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 effective tax rate for the third quarter of fiscal 2022 was 29.9% compared to 24.2% for the third quarter of fiscal 2021.

The change in the effective tax rate was primarily driven by limitations on the deductibility of certain share-based compensation expenses in the third quarter of fiscal 2022 and a discrete benefit for the vesting of employee stock awards in the third quarter of fiscal 2021 that was not material to the effective tax rate in the third quarter of fiscal 2022.

The effective tax rate for fiscal 2022 year-to-date was 19.9% compared to 22.9% for fiscal 2021 year-to-date.

The change in the effective tax rate was 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.

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

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.

was $67 million, or $1.10 per diluted common share, for the third quarter of fiscal 2022, compared to $48 million, or $0.80 per diluted common share, for the third quarter of fiscal 2021.

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

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13-Week Period Ended 39-Week Period Ended

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

(in millions) April 30, 2022 May 1, 2021 Change April 30, 2022 May 1, 2021 Change

Wholesale $ 6,977 $ 6,367 $ 610 $ 20,843 $ 19,423 $ 1,420

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Wholesale (1)

Retail 30 26 4 52 51 1

$ 171 $ 166 $ 5 $ 522 $ 490 $ 32

14 23 (9) 68 75 (7)

Other 11 — 11 27 (4) 31

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Total continuing operations Adjusted EBITDA $ 196 $ 184 $ 12 $ 616 $ 560 $ 56

Second Quarter

(1) Adjusted EBITDA amounts as previously reported by segment have been recast to conform with the revised segment profit measure of Adjusted EBITDA, which excludes the non-cash LIFO charge or benefit recorded by segment.

The effect of the revision increased Adjusted EBITDA for Wholesale and Retail by $4 million and $1 million for the third quarter of fiscal 2021, respectively, and increased Adjusted EBITDA for Wholesale and Retail by $18 million and $1 million for fiscal 2021 year-to-date, respectively.

Third 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 2.4% 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.

The increase in eliminations net sales was driven by higher sales from Other to Wholesale.

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

Retail’s net sales increased primarily due to a 1.1% 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

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 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.

Third Quarter

Wholesale’s Adjusted EBITDA increased 3.0% for the third quarter of fiscal 2022 as compared to the third quarter of fiscal 2021.

The increase was driven by gross profit expansion excluding the LIFO charge, in excess of higher operating costs.

Wholesale’s gross profit increase excluding the LIFO charge for the third quarter of fiscal 2022 was $105 million with a gross profit rate increase of approximately 41 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.

Wholesale’s operating expense increased $101 million, which excludes depreciation and amortization, share-based compensation and other adjustments as outlined in Note 14—Business Segments.

Wholesale’s operating expense rate increased 58 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 third quarter, partially offset by leveraging fixed expenses.

Wholesale’s depreciation expense increased $6 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 Adjusted EBITDA decreased 39.1% for the third quarter of fiscal 2022 as compared to the third quarter of fiscal 2021.

The decrease was driven by higher Retail operating expenses from higher employee and occupancy costs, which excludes depreciation and amortization, share-based compensation and other adjustments as outlined in Note 14—Business Segments.

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 Adjusted EBITDA increased 6.5% for fiscal 2022 year-to-date as compared to fiscal 2021 year-to-date.

The increase was driven by gross profit expansion excluding the LIFO charge, in excess of higher operating costs.

Wholesale’s gross profit increase excluding the LIFO charge for fiscal 2022 year-to-date was $284 million and gross profit rate increased approximately 52 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.

Wholesale’s operating expense increased $252 million, which excludes depreciation and amortization, share-based compensation and other adjustments as outlined in Note 14—Business Segments.

Wholesale’s operating expense rate increased 54 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.

Wholesale’s depreciation expense increased $1 million.

Retail’s Adjusted EBITDA decreased 9.3% for fiscal 2022 year-to-date as compared to fiscal 2021 year-to-date, driven by higher Retail operating expenses from higher employee and occupancy costs, which excludes depreciation and amortization, share-based compensation and other adjustments as outlined in Note 14—Business Segments.

LIQUIDITY AND CAPITAL RESOURCES

• 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.

• Total liquidity as of April 30, 2022 was $909 million and consisted of the following:

◦ Unused credit under our $2,100 million secured asset-based revolving credit facility (the “ABL Credit Facility”) was $861 million, which decreased $419 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 $48 million, which increased $7 million from $41 million as of July 31, 2021.

• 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.

• Our total debt increased $203 million to $2,391 million as of April 30, 2022 from $2,188 million as of July 31, 2021, primarily related to additional borrowings under the ABL Credit Facility, to fund working capital increases.

• Working capital increased $528 million to $1,591 million as of April 30, 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 $4 million.

• 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.

• 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 million term loan facility (the “Term Loan Facility”) funded with incremental borrowings under the ABL Credit Facility that 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.

• In the third 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.

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

This prepayment will also 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.

• Subsequent to the end of the third quarter of fiscal 2022, we entered into a new loan agreement (the “2022 ABL Loan Agreement”), which provides for a $2,600 million secured asset-based revolving credit facility (“2022 ABL Credit Facility”), and we used borrowings thereunder to repay all amounts outstanding under the ABL Credit Facility and terminated the ABL Credit Facility.

Our total available liquidity increased by $500 million in connection with this refinancing, which reflects borrowing base levels at closing.

The 2022 ABL Loan Agreement utilizes Term Secured Overnight Financing Rate (“SOFR”) and Prime rates as the benchmark interest rates.

Borrowings under the 2022 ABL Loan Agreement bear interest at rates that, at the applicable borrowers’ option, can be either:

(i) a base rate plus a 0.00% - 0.25% margin or (ii) a Term SOFR rate plus a 1.00% - 1.25% margin.

Refer to Note 8—Long-Term Debt in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.

Sources and Uses of Cash

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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.

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

Our primary sources of liquidity are from internally generated funds and from borrowing capacity under the 2022 ABL Credit Facility.

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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 the indenture governing our unsecured 6.75% Senior Notes due October 15, 2028 (the “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 2022 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) $210 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 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 have not been subject to the fixed charge coverage ratio covenant under the ABL Loan Agreement or 2022 ABL Loan Agreement, including through the filing date of this Quarterly Report on Form 10-Q.

The Term Loan Agreement, Senior Notes and 2022 ABL Loan Agreement contain certain operational and informational covenants customary for debt securities of these types that limit our and our restricted subsidiaries’ ability to, among other things, incur debt, declare or pay dividends or make other distributions to our stockholders, transfer or sell assets, create liens on our assets, engage in transactions with affiliates, and merge, consolidate or sell all or substantially all of our and our subsidiaries’ assets on a consolidated basis.

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

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

Subsequent to the end of the third quarter of fiscal 2022, on June 3, 2022, we entered into an amendment ( the “Third Term Loan Amendment”) to the Term Loan Agreement to amend the reference rate thereunder from LIBOR to Term SOFR.

There were no other changes to the Term Loan Agreement as a result of the Third Loan Amendment.

We do not expect to record any gains or losses on the conversion of these interest rate swap contracts from LIBOR to SOFR.

Derivatives and Hedging Activity

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

As of 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.

As of April 30, 2022, we had an aggregate of $1,230 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.

The fair value of these interest rate derivatives represent a long-term asset of $5 million and a current liability of $5 million as of April 30, 2022, and are subject to volatility based on changes in market interest rates.

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

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See Note 7—Derivatives in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.

As discussed above, subsequent to the end of the third quarter of fiscal 2022, we (i) entered into the 2022 ABL Loan Agreement, (ii) amended the Term Loan Agreement to change the Term Loan Facility reference rate from LIBOR to Term SOFR and (iii) amended our outstanding interest rate swap contracts to replace One-Month LIBOR with One-Month Term SOFR.

We do not expect to record any gains or losses upon the conversion of the reference rates in these interest rate swap contracts, and we believe these amendments will not have a material impact on our Condensed Consolidated Financial Statements.

The cumulative effect of these changes includes the replacement of LIBOR with Term SOFR as the benchmark interest rate from all remaining credit facilities.

As such, we expect to adopt ASU 2020-04, as discussed in Note 2—Recently Adopted and Issued Accounting Pronouncements in Part I, Item 1 of this Quarterly Report on Form 10-Q, which will allow us to continue to apply hedge accounting to our outstanding interest rate swap contracts and terminated or novated interest rate swap contracts for which the hedged interest rate transactions are still probable of occurring.

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

As of January 29, 2022, we had fixed price fuel contracts outstanding and foreign currency forward agreements outstanding.

As of April 30, 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 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.

Our capital expenditures for fiscal 2022 year-to-date were $158 million compared to $165 million for fiscal 2021 year-to-date, a decrease of $7 million.

Our capital spending for fiscal 2022 and 2021 year-to-date principally included information technology and supply chain expenditures, including continued investment in the new Allentown, Pennsylvania distribution center.

Fiscal 2022 capital spending is expected to be approximately $250 million and includes projects that optimize and expand our distribution network, technology platform investments and the remaining investments in the Allentown, Pennsylvania distribution center.

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

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39-Week Period Ended

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

Net cash provided by operating activities of continuing operations

(in millions) April 30, 2022 May 1, 2021 Change

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

$ (31) $ 338 $ (369)

Net cash used in investing activities of continuing operations

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

Net cash used in financing activities

(7) (232) 225

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

Net cash provided by discontinued operations — 1 (1)

Net cash used in discontinued operations — (1) 1

Effect of exchange rate on cash — — —

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Cash and cash equivalents, at end of period $ 48 $ 40 $ 8

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.

The increase in net cash used in operating activities of continuing operations in fiscal 2022 year-to-date compared to fiscal 2021 year-to-date was primarily due to increases in inventory driven by higher purchasing levels intended to offset supply chain limitations 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.

The increase in net cash provided by investing activities of continuing operations in fiscal 2022 year-to-date compared to fiscal 2021 year-to-date was primarily due to proceeds received from the sale of the Riverside, California distribution center discussed above, partially offset by higher cash payments for investments.

The decrease in net cash used in financing activities 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, partially offset by an increase in net cash provided by investing activities, as described above.

Other Obligations and Commitments

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.

Except as otherwise disclosed in Note 8—Long-Term Debt and in Note 15—Commitments, Contingencies and Off-Balance Sheet Arrangements for the sale-leaseback transaction 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.

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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.

As of April 30, 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.

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.

Additionally, the 2022 ABL Credit Facility, Term Loan Facility and Senior Notes contain terms that limit our ability to repurchase common stock above certain levels unless certain conditions and financial tests are met.

Critical Accounting Policies and Estimates

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Refer to the description of critical accounting policies included in Item 7 of our Annual Report.

In the third quarter of fiscal 2022, we experienced an increase in product cost inflation and also raised our expectation of the year end inflation rate in ending LIFO-based inventory.

When holding inventory levels and mix constant, we estimate a 50 basis point increase in the inflation rate in our ending LIFO-based inventory results in an increase in the non-cash LIFO charge of approximately $10 million on an annual basis.

Generally, we do not experience material seasonality.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis