What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-03-08 compared with 2022-12-07 · 137 added, 94 removed, 276 unchanged (46% of the section changed)

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

• the impact and duration of any pandemics or disease outbreaks;

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

• labor and other workforce shortages and challenges;

• our ability to realize anticipated benefits of our strategic initiatives, including any acquisitions;

• labor and other workforce shortages and challenges;

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

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

• the impact and duration of any pandemics or disease outbreaks;

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

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

We are committed to executing our Fuel the Future strategy with the mission of building a food ecosystem that is better for all by delivering great food, more choices and fresh thinking for our customers and suppliers.

Our Fuel the Future strategy consists of six pillars and is underpinned by four focus areas, which are detailed in “Part I.

Business” of our Annual Report.

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

We expect to continue to use available capital to re-invest in our business to support our Fuel the Future initiatives and to reduce outstanding debt, and we remain committed to improving our financial leverage.

We are focused on executing our transformation strategy, which we believe will position us for long-term profitable growth.

Our enterprise-wide business transformation program consists of four areas:

network automation and optimization;

commercial value creation;

digital offering enhancement and infrastructure unification and modernization.

These four areas represent the next evolution of our business strategy.

To enable this business transformation, we have engaged consultants and brought in new leadership with transformation experience to upgrade and modernize our technology and platforms to better serve our customers.

We expect to continue to use available capital to re-invest in our business and to reduce outstanding debt, and we remain committed to improving our financial leverage over time.

The decline in our financial leverage in recent years offers us increased flexibility to invest in growing our business and selectively return cash to shareholders as appropriate.

We believe our Fuel the Future strategy will accelerate our growth through increasing sales of products and services, providing tailored, data-driven solutions to help our customers run their businesses more efficiently and contributing to customer acquisitions.

We believe we can accelerate our growth through our transformation efforts, which we expect will increase sales of products and services, and provide tailored, data-driven solutions to help our customers run their businesses more efficiently and contribute to customer acquisitions.

We believe the key drivers for new customer growth will be the benefits of our significant scale, product and service offerings and nationwide footprint.

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Consumer spending may be impacted by levels of discretionary income and consumers trading down to a less expensive mix of products for grocery items.

In addition, inflation has increased and continues to be unpredictable.

For example, we experienced volatility in our energy operating costs, and commodity and labor input costs have impacted the prices of products we procured from manufacturers.

We believe our product mix ranging from high-quality natural and organic products to national and local conventional brands, including cost conscious private label brands, positions us to serve a broad cross section of North American retailers and end customers, and may lessen the impact of any shifts in consumer and industry trends in grocery product mix.

We continue to experience a tight labor market for our warehouse and driver associates, which has caused additional reliance on third-party resources, incremental hiring and increases in wages, all of which has led to higher labor expenses.

We believe this operating environment has been impacted by labor force availability, in part as a result of the COVID-19 pandemic, which we refer to as the pandemic.

We continue to take actions to maintain existing employment levels, fill open roles and prepare for future employment needs.

Uncertainty remains regarding the longer-term impact of the pandemic on our business as global economies, markets and supply chains respond to the ongoing effects.

In addition, inflation remains at elevated levels and continues to be unpredictable.

For example, we experienced volatility in our energy operating costs, and commodity and labor input costs continue to impact the prices of products we procure from manufacturers.

We believe our product mix, which ranges from high-quality natural and organic products to national and local conventional brands, including cost conscious private label brands, positions us to serve a broad cross section of North American retailers and end customers, and may lessen the impact of any shifts in consumer and industry trends in grocery product mix.

Uncertainty remains regarding the longer-term impact of the COVID-19 pandemic on our business as global economies, markets and supply chains respond to the ongoing effects.

We continue to monitor guidelines released by the Centers for Disease Control and Prevention and the World Health Organization and, when appropriate, implement mitigation measures to protect our associates, including safety protocols and strongly encouraging vaccinations/boosters.

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Wholesale Distribution Center Network

We evaluate our distribution center network to optimize performance and expect to incur incremental expenses related to any future network realignment, expansion or improvements.

We evaluate our distribution center network to optimize performance and expect to incur incremental expenses related to any future network realignment, expansion or improvements, including initiatives under the network automation and optimization pillar of our transformation agenda.

We are working to both minimize these potential future costs and obtain new business to further improve the efficiency of our transforming distribution network.

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Impact of Product Cost Inflation

We experienced a mix of inflation across product categories during the first quarter of fiscal 2023.

In the aggregate across our businesses, including the mix of products, management estimates our businesses experienced product cost inflation of approximately ten percent in the first quarter of fiscal 2023, as compared to the first quarter of fiscal 2022.

We experienced a mix of inflation across product categories during the second quarter of fiscal 2023 .

In the aggregate across our businesses, including the mix of products, management estimates our businesses experienced product cost inflation of approximately ten percent in the second quarter of fiscal 2023 , as compared to 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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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.

In the second quarter of fiscal 2023, we experienced a sequential deceleration in the number and magnitude of vendor product cost increases as compared to the first quarter of fiscal 2023, which negatively impacted our gross profit rate.

Composition of Condensed Consolidated Statements of Operations and Business Performance Assessment

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Restructuring, acquisition and integration related 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 related expenses.

Integration related 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.

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

Net periodic benefit income, excluding service cost

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We define Adjusted EBITDA as a consolidated measure which we reconcile by adding Net income (loss) including noncontrolling interests, 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 (income) expense, 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, and certain other non-cash charges or other items, as determined by management.

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.

During fiscal 2022, we revised our definition of Adjusted EBITDA to exclude the impact of the non-cash LIFO charge or benefit.

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We have revised the following tables for the change in segment profit measurement for Adjusted EBITDA as discussed in Note 13—Business Segments within Part I, Item 1 of this Quarterly Report on Form 10-Q.

13-Week Period Ended

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

13-Week Period Ended 26-Week Period Ended

(in millions) January 28, 2023 January 29, 2022 Change January 28, 2023 January 29, 2022 Change

Net sales $ 7,816 $ 7,416 $ 400 $ 15,348 $ 14,413 $ 935

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Restructuring, acquisition and integration related expenses 3 5 (2) 5 8 (3)

Gain on sale of assets (5) — (5)

Loss (gain) on sale of assets 1 1 — (4) 1 (5)

Operating income 63 125 (62) 162 232 (70)

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Interest expense, net 39 44 (5) 74 84 (10)

Other (income) expense, net (1) 1 (2)

Other income, net — (2) 2 (1) (1) —

Income before income taxes 31 93 (62) 103 169 (66)

Provision (benefit) for income taxes 5 (1) 6

Provision for income taxes 9 25 (16) 14 24 (10)

Net income including noncontrolling interests 22 68 (46) 89 145 (56)

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The following table reconciles Net income including noncontrolling interests to Adjusted EBITDA:

13-Week Period Ended

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

13-Week Period Ended 26-Week Period Ended

(in millions) January 28, 2023 January 29, 2022 January 28, 2023 January 29, 2022

Net income including noncontrolling interests $ 22 $ 68 $ 89 $ 145

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Net periodic benefit income, excluding service cost

(7) (10) (14) (20)

Interest expense, net 39 44 74 84

Other (income) expense, net (1) 1

Provision (benefit) for income taxes 5 (1)

Other income, net — (2) (1) (1)

Provision for income taxes 9 25 14 24

Depreciation and amortization 73 69 147 138

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Restructuring, acquisition and integration related expenses

Gain on sale of assets (5) —

Loss (gain) on sale of assets

Multiemployer pension plan withdrawal benefit (2)

Other retail benefit (3)

Business transformation costs (4)

Adjusted EBITDA $ 181 $ 220 $ 388 $ 420

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

13-Week Period Ended

(in millions) October 30, 2021

13-Week Period Ended 26-Week Period Ended

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

Adjusted EBITDA (previously reported definition) $ 201 $ 390

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Adjusted EBITDA (current definition) $ 220 $ 420

(2) Includes costs for certain technology-related initiatives.

(2) Reflects an adjustment to multiemployer pension plan withdrawal charge estimates.

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

(4) Reflects third-party professional consulting costs for business transformation initiatives, including network automation and optimization, commercial value creation, digital offering enhancement and infrastructure unification and modernization.

RESULTS OF OPERATIONS

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13-Week Period Ended

Increase (Decrease) 26-Week Period Ended

Increase (Decrease)

Customer Channel (1)

2022 October 30,

2023 January 29,

2022 $ % January 28,

2023 January 29,

Chains $ 3,322 $ 3,243 $ 79 2.4 % $ 6,546 $ 6,325 $ 221 3.5 %

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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 2023 increased approximately 7.6% from the first quarter of fiscal 2022.

Second Quarter

Our Net sales for the second quarter of fiscal 2023 increased approximately 5.4% from the second quarter of fiscal 2022.

The increase in Net sales was primarily driven by inflation and new business.

This new business resulted from selling new or expanded categories to existing customers and adding new customers from our robust pipeline.

These increases were partially offset by an expected decrease in unit volume consistent with the overall industry.

This new business resulted from selling new or expanded categories to existing customers and adding new customers.

These increases were partially offset by a decrease in units sold.

Chains and Independent retailers Net sales increased primarily due to growth in sales to existing and new customers, including an increase from higher product costs, which drove higher wholesale selling prices to our customers, partially offset by a decrease in units sold.

Supernatural Net sales increased primarily due to growth in existing store sales, including the supply of new fresh categories, inflation, and increased sales to new stores, partially offset by a decrease in units sold.

Retail Net sales increased primarily due to a 0.9% increase in identical store sales from higher average basket sizes driven by inflation, offset by lower volume.

Other Net sales increased primarily due to higher eCommerce sales.

Our Net sales for fiscal 2023 year-to-date increased approximately 6.5% from fiscal 2022 year-to-date.

The increase in Net sales was primarily driven by inflation and new business.

This new business resulted from selling new or expanded categories to existing customers and adding new customers.

These increases were partially offset by a decrease in units sold.

Chains Net sales increased primarily due to growth in sales to existing and new customers, including an increase from higher product costs, which drove higher wholesale selling prices to our customers, partially offset by a decrease in units sold.

Independent retailers Net sales increased primarily due to sales under a supply agreement with a new customer within the Atlantic region 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, partially offset by a decrease in units sold.

Supernatural Net sales increased primarily due to growth in existing store sales, including the supply of new fresh categories, inflation, and increased sales to new stores.

Independent retailers Net sales increased primarily due to increased sales under a supply agreement with a new customer within the Atlantic region 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, partially offset by a decrease in units sold.

Retail Net sales increased primarily due to a 1.4% increase in identical store sales from higher average basket sizes driven by inflation, offset by lower volume.

Other Net sales increased primarily due to higher e-commerce sales.

Other Net sales increased primarily due to higher eCommerce sales.

Cost of Sales and Gross Profit

Our gross profit increased $54 million, or 5.2%, to $1,096 million for the first quarter of fiscal 2023, from $1,042 million for the first quarter of fiscal 2022.

Our gross profit as a percentage of Net sales decreased to 14.6% for the first quarter of fiscal 2023 compared to 14.9% for the first quarter of fiscal 2022.

The LIFO charge was $21 million and $11 million in the first quarter of fiscal 2023 and 2022, respectively.

E xcluding the non-cash LIFO charge, gross profit rate was 14.8% of Net sales and 15.0% of Net sales for the first quarter of fiscal 2023 and 2022, respectively.

The decrease in gross profit rate, excluding the LIFO charge, was driven by changes in customer mix as we continued to grow sales with larger customers.

Our gross profit decreased $6 million, or 0.6%, to $1,069 million for the second quarter of fiscal 2023, from $1,075 million for the second quarter of fiscal 2022.

Our gross profit as a percentage of Net sales decreased to 13.7% for the second quarter of fiscal 2023 compared to 14.5% for the second quarter of fiscal 2022.

The LIFO charge was $29 million and $19 million in the second quarter of fiscal 2023 and 2022, respectively.

E xcluding the non-cash LIFO charge, gross profit rate was 14.0% of Net sales and 14.8% of Net sales for the second quarter of fiscal 2023 and 2022 , respectively.

The decrease in gross profit rate, excluding the LIFO charge, was primarily driven by lower current period procurement gains due to the decelerating rate of inflation and lower inventory gains.

Our gross profit increased $48 million, or 2.3% to $2,165 million for fiscal 2023 year-to-date, from $2,117 million for fiscal 2022 year-to-date.

Our gross profit as a percentage of Net sales decreased to 14.1% for fiscal 2023 year-to-date compared to 14.7% for fiscal 2022 year-to-date.

The LIFO charge was $50 million and $30 million for fiscal 2023 and fiscal 2022 year-to-date, respectively.

Excluding the non-cash LIFO charge, gross profit rate was 14.4% of Net sales and 14.9% of Net sales for fiscal 2023 and fiscal 2022 year-to-date, respectively.

The decrease in gross profit rate, excluding LIFO charge, was primarily driven by lower current period procurement gains due to the decelerating rate of inflation, lower inventory gains and customer mix.

Operating Expenses

Operating expenses increased $68 million, or 7.3%, to $1,000 million, or 13.3% of Net sales, for the first quarter of fiscal 2023 compared to $932 million, or 13.3% of Net sales, for the first quarter of fiscal 2022.

Operating expenses as a percent of Net sales for the first quarter of fiscal 2023 were approximately flat compared to the first quarter of fiscal 2022, primarily driven by continued investments in servicing our customers, which led to higher transportation and distribution center labor costs in the first quarter of fiscal 2023, and higher occupancy costs, partially offset by leveraging fixed expenses across higher sales.

Operating expenses increased $58 million, or 6.1%, to $1,002 million, or 12.8% of Net sales, for the second quarter of fiscal 2023 compared to $944 million, or 12.7% of Net sales, for the second quarter of fiscal 2022.

Operating expenses as a percent of Net sales was approximately flat compared to the second quarter of fiscal 2022, after excluding an $8 million benefit related to an adjustment to a previous multiemployer pension plan withdrawal charge estimate in the second quarter of fiscal 2022.

Operating expenses increased $126 million, or 6.7%, to $2,002 million, or 13.0% of Net sales, for fiscal 2023 year-to-date compared to $1,876 million, or 13.0% of Net sales, for fiscal 2022 year-to-date.

Operating expenses as a percent of Net sales was approximately flat to the second quarter fiscal 2022 year-to-date;

however, Operating expenses included higher occupancy costs in fiscal 2023 year-to-date, which were offset by leveraging fixed expenses across higher sales.

Operating Income

Reflecting the factors described above, Operating income decreased $8 million to $99 million for the first quarter of fiscal 2023, compared to $107 million for the first quarter of fiscal 2022.

Reflecting the factors described above, Operating income decreased $62 million to $63 million for the second quarter of fiscal 2023, compared to $125 million for the second quarter of fiscal 2022.

The decrease in operating income was primarily driven by a decrease in gross profit and an increase in operating expenses as described above.

Reflecting the factors described above, Operating income decreased $70 million, to $162 million for fiscal 2023 year-to-date, compared to $232 million for fiscal 2022 year-to-date.

The decrease in operating income was primarily driven by an increase in operating expenses in excess of an increase in gross profit as described above.

Interest Expense, Net

13-Week Period Ended

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

13-Week Period Ended 26-Week Period Ended

(in millions) January 28, 2023 January 29, 2022 January 28, 2023 January 29, 2022

Interest expense on long-term debt, net of capitalized interest $ 33 $ 30 $ 65 $ 63

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Amortization of financing costs and discounts 3 3 5 6

Loss on debt extinguishment 3 6 3 6

Interest expense, net $ 39 $ 44 $ 74 $ 84

The decrease in interest expense, net, in the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022 was primarily driven by lower outstanding debt balances.

In addition, our interest expense included the benefit of lower interest expense on our portfolio of interest rate swaps, partially offset by higher average floating interest rates on the company’s credit facilities.

Provision (Benefit) for Income Taxes

The effective tax rate for the first quarter of fiscal 2023 was an expense rate of 6.9% compared to a benefit rate of 1.3% for the first quarter of fiscal 2022.

The effective tax rate for both periods was reduced by the impact of discrete tax benefits related to the vesting of employee stock awards.

The change from the first quarter of fiscal 2022 was primarily driven by the reduction of these discrete tax benefits during the first quarter of fiscal 2023.

The decrease in interest expense, net, in the second quarter of fiscal 2023 compared to the second quarter of fiscal 2022 and in fiscal 2023 year-to-date compared to 2022 year-to-date was primarily driven by lower outstanding debt balances and finance leases, partially offset by higher average interest rates.

Provision for Income Taxes

The effective tax rate for the second quarter of fiscal 2023 was 29.0% compared to 26.9% for the second quarter of fiscal 2022.

The change was driven primarily by the reduction in pre-tax income during the second quarter of fiscal 2023.

The effective tax rate for fiscal 2023 year-to-date was 13.6% compared to 14.2% for fiscal 2022 year-to-date.

The effective tax rate for both fiscal 2023 and fiscal 2022 year-to-date was reduced by the impact of discrete tax benefits related to the vesting of employee stock awards.

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 $66 million, or $1.07 per diluted common share, for the first quarter of fiscal 2023, compared to $76 million, or $1.25 per diluted common share, for the first quarter of fiscal 2022.

was $19 million, or $0.31 per diluted common share, for the second quarter of fiscal 2023, compared to $66 million, or $1.08 per diluted common share, for the second quarter of fiscal 2022.

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

was $85 million, or $1.38 per diluted common share, for fiscal 2023 year-to-date, compared to $142 million, or $2.33 per diluted common share, for fiscal 2022 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 29, 2022 October 30, 2021 Change

13-Week Period Ended 26-Week Period Ended

(in millions) January 28, 2023 January 29, 2022 Change January 28, 2023 January 29, 2022 Change

Wholesale $ 7,514 $ 7,132 $ 382 $ 14,773 $ 13,866 $ 907

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$ 137 $ 176 $ (39) $ 308 $ 351 $ (43)

28 32 (4) 48 54 (6)

Other 15 12 3 34 16 18

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(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 recorded by segment.

The effect of the revision increased Adjusted EBITDA for Wholesale by $11 million for the first quarter of fiscal 2022.

The impact on Retail was insignificant.

Wholesale’s Net sales increased primarily due to growth in sales to new and existing customers, including an increase from higher product costs, in Independent retailers, Chains and Supernatural channels, as discussed in Results of Operations - Net Sales section above.

The effect of the revision increased Adjusted EBITDA for Wholesale by $17 million and Retail by $2 million for the second quarter of fiscal 2022, and increased Adjusted EBITDA for Wholesale by $28 million and Retail by $2 million for fiscal 2022 year-to-date.

Second Quarter

Wholesale’s Net sales increased primarily due to growth in sales to new and existing customers, including an increase from higher product costs, in Supernatural, Chains and Independent retailers channels, as discussed in Results of Operations - Net Sales section above.

Retail’s Net sales increased primarily due to a 0.9% increase in identical store sales from higher average basket sizes driven by inflation, offset by lower volume.

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 new and existing customers, including an increase from higher product costs, in Supernatural, Independent retailers and Chains channels, as discussed in Results of Operations - Net Sales section above.

Retail’s Net sales increased primarily due to a 1.4% increase in identical store sales from higher average basket sizes driven by inflation, offset by lower volume.

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

Adjusted EBITDA

Wholesale’s Adjusted EBITDA decreased 2.3% for the first quarter of fiscal 2023 as compared to the first quarter of fiscal 2022.

Second Quarter

Wholesale’s Adjusted EBITDA decreased 22.2% for the second quarter of fiscal 2023 as compared to the second quarter of fiscal 2022.

The decrease was driven by an increase in operating expenses combined with a slight gross profit decline excluding the LIFO charge.

Wholesale’s Gross profit decrease excluding the LIFO charge for the second quarter of fiscal 2023 was $3 million with a gross profit rate decrease of approximately 69 basis points primarily driven by lower current period procurement gains due to the decelerating rate of inflation and lower inventory gains.

Wholesale’s Operating expense increased $36 million, which excludes depreciation and amortization, share-based compensation and other adjustments as outlined in Note 13—Business Segments.

Wholesale’s operating expense rate was approximately flat compared to the second quarter of fiscal 2022.

Wholesale’s depreciation and amortization expense increased $1 million compared to the second quarter of fiscal 2022.

Retail’s Adjusted EBITDA decreased 12.5% for the second quarter of fiscal 2023 as compared to the second quarter of fiscal 2022.

The decrease was driven by higher operating expenses primarily due to new store start-up costs and a slightly lower gross profit rate compared to the second quarter of fiscal 2022.

Retail’s Adjusted EBITDA excludes depreciation and amortization, share-based compensation, LIFO charge and other adjustments as outlined in Note 13—Business Segments.

Retail’s depreciation and amortization expense increased $2 million compared to the second quarter of fiscal 2022.

Wholesale’s Adjusted EBITDA decreased 12.3% for fiscal 2023 year-to-date from fiscal 2022 year-to-date.

The decrease was driven by an increase in operating expenses in excess of gross profit growth excluding the LIFO charge.

Wholesale’s Gross profit increase excluding the LIFO charge for the first quarter of fiscal 2023 was $65 million with a gross profit rate decrease of approximately 4 basis points primarily driven by changes in customer mix.

Wholesale’s Gross profit increase excluding the LIFO charge for fiscal 2023 year-to-date was $62 million with a gross profit rate decrease of approximately 37 basis points primarily driven by lower current period procurement gains due to the decelerating rate of inflation and inventory gains as compared to fiscal 2022 year-to-date, and a decrease from changes in customer mix.

Wholesale’s Operating expense increased $105 million, which excludes depreciation and amortization, share-based compensation and other adjustments as outlined in Note 13—Business Segments.

Wholesale’s operating expense rate increased 18 basis points primarily driven by continued investments in servicing our customers, which led to higher transportation and distribution labor costs in the first quarter of fiscal 2023, and higher occupancy costs.

These increases were partially offset by leveraging fixed costs.

Wholesale’s depreciation and amortization expense increased $3 million compared to the first quarter of fiscal 2022.

Retail’s Adjusted EBITDA decreased 9.1% for the first quarter of fiscal 2023 as compared to the first quarter of fiscal 2022.

Retail’s gross profit rate was approximately flat compared to the first quarter of fiscal 2022 and operating expenses increased primarily due to higher employee-related costs.

Wholesale’s operating expense rate increased 7 basis points primarily driven by higher occupancy costs in fiscal 2023 year-to-date.

Wholesale’s depreciation and amortization expense increased $4 million compared to fiscal 2022 year-to-date.

Retail’s Adjusted EBITDA decreased 11.1% for fiscal 2023 year-to-date as compared to fiscal 2022 year-to-date, driven by higher operating expenses from higher employee-related costs and new store start-up costs.

Retail’s Adjusted EBITDA excludes depreciation and amortization, share-based compensation, LIFO charge and other adjustments as outlined in Note 13—Business Segments.

Retail’s depreciation and amortization expense increased $1 million compared to the first quarter of fiscal 2022.

LIQUIDITY AND CAPITAL RESOURCES

• Total liquidity as of October 29, 2022 was $1,289 million and consisted of the following:

◦ Unused credit under the ABL Credit Facility was $1,250 million, which decreased $377 million from $1,627 million as of July 30, 2022, primarily due to increased cash utilized to fund seasonal working capital increases.

• Total liquidity as of January 28, 2023 was $1,573 million and consisted of the following:

◦ Unused credit under our $2,600 million asset-based revolving credit facility (the “ABL Credit Facility”) was $1,533 million, which decreased $94 million from $1,627 million as of July 30, 2022, primarily due to increased cash utilized to fund working capital increases, partially offset by the reduction in ABL borrowings related to the monetization of certain receivables net of the related $125 million voluntary prepayment on our term loan agreement dated as of October 22, 2018 (as amended, the “Term Loan Agreement”) described below.

◦ Cash and cash equivalents was $40 million, which decreased $4 million from $44 million as of July 30, 2022.

• Our total debt increased $376 million to $2,499 million as of October 29, 2022 from $2,123 million as of July 30, 2022, primarily related to additional borrowings under the ABL Credit Facility to fund seasonal working capital increases.

• Working capital increased $415 million to $1,795 million as of October 29, 2022 from $1,380 million as of July 30, 2022, primarily due to seasonal increases in inventory and accounts receivable levels, partially offset by an increase in accounts payable related to inventories.

• Subsequent to the end of the first quarter of fiscal 2023, we monetized certain receivables within Accounts receivable, net, pursuant to a purchase agreement with a third-party financial institution for the sale of certain receivables up to $300 million, which generated net cash proceeds of $253 million.

• Our total debt decreased $46 million to $2,077 million as of January 28, 2023 from $2,123 million as of July 30, 2022, primarily driven by debt repayments from net cash flow from operating activities, partially offset by payments for capital expenditures and repurchases of common stock during fiscal 2023 year-to-date.

• Working capital decreased $35 million to $1,345 million as of January 28, 2023 from $1,380 million as of July 30, 2022, primarily due to lower accounts receivable levels resulting from the monetization of certain receivables, partially offset by an increase in inventories net of the associated increase in accounts payable.

• In the second quarter of fiscal 2023, we monetized certain receivables previously within accounts receivable, pursuant to a purchase agreement with a third-party financial institution for the sale of certain receivables up to $300 million, which generated net cash proceeds of $282 million.

These proceeds were used to make a $125 million voluntary prepayment on the Term Loan Facility and reduce outstanding borrowings under the ABL Credit Facility.

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Long-Term Debt

During the first quarter of fiscal 2023, we borrowed a net $377 million under the ABL Credit Facility.

Subsequent to the end of the first quarter of fiscal 2023, we made a $125 million voluntary prepayment on the Term Loan Facility with a portion of the proceeds received from monetizing certain receivables within Accounts receivable, net.

During fiscal 2023 year-to-date, we borrowed a net $83 million under the ABL Credit Facility and made voluntary prepayments on the Term Loan Facility totaling $130 million with a portion of the proceeds received from monetizing certain receivables previously within accounts receivable, and from asset sales.

Our Term Loan Agreement and Senior Notes do not include any financial maintenance covenants.

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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 29, 2022, we had an aggregate of $1,200 million of floating rate notional debt subject to active interest rate swap contracts, which effectively hedge the SOFR component of our interest rate payments through pay fixed and receive floating interest rate swap agreements.

These fixed rates range from 2.274% to 2.875%, with maturities between October 2022 and October 2025.

The fair value of these interest rate derivatives represent a current asset of $16 million and a long-term asset of $11 million as of October 29, 2022, and are subject to volatility based on changes in market interest rates.

As of January 28, 2023, we had an aggregate of $1,000 million of floating rate notional debt subject to active interest rate swap contracts, which effectively hedge the SOFR component of our interest rate payments through pay fixed and receive floating interest rate swap agreements.

These fixed rates range from 2.360% to 2.875%, with maturities between March 2023 and October 2025.

The fair value of these interest rate derivatives represent a current asset of $17 million and a long-term asset of $5 million as of January 28, 2023, and are subject to volatility based on changes in market interest rates.

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

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

As of January 28, 2023, we had fixed price fuel contracts 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 2023 were $67 million compared to $56 million for the first quarter of fiscal 2022, an increase of $11 million.

Our capital spending for the first quarter of fiscal 2023 and 2022 principally included information technology and supply chain expenditures, including continued investment in the new Allentown, Pennsylvania distribution center during the first quarter of fiscal 2022.

Our capital expenditures for fiscal 2023 year-to-date were $151 million compared to $106 million for fiscal 2022 year-to-date, an increase of $45 million, primarily due to investments in automation.

Our capital spending for fiscal 2023 and 2022 year-to-date principally included information technology and supply chain expenditures.

Fiscal 2022 year-to-date included continued investment in the new Allentown, Pennsylvania distribution center.

Fiscal 2023 capital spending is expected to be approximately $350 million and include projects that automate, optimize and expand our distribution network, and finance our technology platform investments.

4 unchanged sentences

26-Week Period Ended

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

Net cash used in operating activities

(in millions) January 28, 2023 January 29, 2022 Change

Net cash provided by operating activities

$ 270 $ 43 $ 227

Net cash used in investing activities

Net cash provided by financing activities

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

(143) (129) (14)

Net cash (used in) provided by financing activities

(131) 91 (222)

Net (decrease) increase in cash and cash equivalents (4) 5 (9)

1 unchanged sentence

Cash and cash equivalents, at end of period $ 40 $ 45 $ (5)

The increase in net cash used in operating activities in the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022 was primarily due to higher levels of cash utilized to build inventories and a decrease in accounts payable relative to inventory increases, partly due to earlier seasonal inventory purchases in the first quarter of fiscal 2023.

The decrease in net cash used in investing activities in the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022 was primarily due to a reduction in payments for investments.

The increase in net cash provided by financing activities in the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022 was primarily due to a larger increase in net borrowings under the ABL Credit Facility resulting from increases in net cash used in operating activities, net of cash used in investing activities, as described above.

The increase in net cash provided by operating activities in fiscal 2023 year-to-date compared to fiscal 2022 year-to-date was primarily due to the monetization of certain receivables in fiscal 2023 year-to-date discussed above, pursuant to a purchase agreement with a third-party financial institution, which generated net cash proceeds of $282 million.

The increase in net cash used in investing activities in fiscal 2023 year-to-date compared to fiscal 2022 year-to-date was primarily due to higher capital expenditures, as described above, partially offset by a reduction in payments for investments.

The increase in net cash used in financing activities in fiscal 2023 year-to-date compared to fiscal 2022 year-to-date was primarily due to lower net borrowings under the ABL Credit Facility resulting from increases in net cash provided by operating activities, net of cash used in investing activities, as described above.

Other Obligations and Commitments

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

There have been no material changes in our contractual obligations since the end of fiscal 2022.

Except as otherwise disclosed in Note 14—Commitments, Contingencies and Off-Balance Sheet Arrangements and Note 7—Long-Term Debt, there have been no material changes in our contractual obligations since the end of fiscal 2022.

Refer to Item 7 of the Annual Report for additional information regarding our contractual obligations.

30 unchanged sentences

In September 2022, our Board of Directors authorized a new repurchase program for up to $200 million of our common stock over a term of four years (the “2022 Repurchase Program”).

Upon approval of the 2022 Repurchase Program, our Board terminated the repurchase program authorized in October 2017 (the “2017 Repurchase Program”).

In the first quarter of fiscal 2023, we repurchased approximately 0.4 million shares of our common stock for a total cost of $12 million under the 2022 Repurchase Program.

As of October 29, 2022, we had $188 million remaining authorized under the 2022 Repurchase Program.

Under the 2022 Repurchase Program, we repurchased approximately 390,000 shares of our common stock for a total cost of $17 million in the second quarter of fiscal 2023 and approximately 729,000 shares of our common stock for a total cost of $29 million in fiscal 2023 year-to-date.

As of January 28, 2023, we had $171 million remaining authorized under the 2022 Repurchase Program.

We will manage the timing of any repurchases of our common stock in response to market conditions and other relevant factors, including any limitations on our ability to make repurchases under the terms of our ABL Credit Facility, Term Loan Facility and Senior Notes.

8 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