What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-06-07 compared with 2023-03-08 · 106 added, 107 removed, 306 unchanged (41% of the section changed)

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• our ability to timely and successfully deploy our warehouse management system throughout our distribution centers and our transportation management system across the Company and to achieve efficiencies and cost savings from these efforts;

• the potential for disruptions in our supply chain or our distribution capabilities from circumstances beyond our control, including due to lack of long-term contracts, severe weather, labor shortage or work stoppages or otherwise;

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

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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 are also working on near-term initiatives to help improve profitability while we execute our longer-term initiatives.

These include actioning administrative structure efficiencies, as well as commercial contract reviews in collaboration with our customers and suppliers.

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 the long term.

The decline in our financial leverage in recent years offers us increased financial flexibility.

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.

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We believe food-at-home expenditures as a percentage of total food expenditures are subject to these trends, including changes in consumer behaviors in response to social and economic trends, such as levels of disposable income and the health of the economy in which our customers and our stores operate.

economy has experienced economic volatility in recent years due to uncertain economic conditions, which have had, and we expect may continue to have, an impact on consumer confidence.

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

economy has experienced economic volatility in recent years, which has had, and we expect may continue to have, an impact on consumer confidence.

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

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

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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.

Our results could be impacted by, among other factors, any resurgence of infection rates and new variants of COVID-19 with higher transmissibility, the availability and efficacy of vaccines and treatments, actions taken by governmental authorities and other third parties in response to the pandemic such as health and safety orders and mandates, companies’ remote work policies, any economic downturn, the impact on capital and financial markets, food-at-home purchasing levels and other consumer trends, each of which is uncertain.

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

We 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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Impact of Product Cost Inflation

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 .

We experienced a mix of inflation across product categories during the third 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 eight percent in the third quarter of fiscal 2023 , as compared to 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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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.

In the third quarter of fiscal 2023, we experienced fewer and less significant vendor product cost increases as compared to the third quarter of fiscal 2022.

These decreases negatively impacted our gross profit rate when comparing the third quarter of fiscal 2023 to the third quarter of fiscal 2022.

Composition of Condensed Consolidated Statements of Operations and Business Performance Assessment

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

Restructuring, acquisition and integration related expenses

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.

Restructuring, acquisition and integration related (benefits) expenses

Restructuring, acquisition and integration related (benefits) 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 and incremental expenses related to combining facilities required to optimize our distribution network as a result of acquisitions.

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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.

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

We believe that this change provides a better indicator of our underlying operating performance and permits better comparability between periods.

Refer to footnote one in the table below and Note 13—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.

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 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 39-Week Period Ended

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

(in millions) April 29, 2023 April 30, 2022 Change April 29, 2023 April 30, 2022 Change

Net sales $ 7,507 $ 7,242 $ 265 $ 22,855 $ 21,655 $ 1,200

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Operating expenses 967 969 (2) 2,969 2,845 124

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

Restructuring, acquisition and integration related (benefits) expenses (4) 8 (12) 1 16 (15)

Loss (gain) on sale of assets 4 (88) 92 — (87) 87

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Income before income taxes 7 97 (90) 110 266 (156)

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

(Benefit) provision for income taxes (1) 29 (30) 13 53 (40)

Net income including noncontrolling interests 8 68 (60) 97 213 (116)

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13-Week Period Ended 39-Week Period Ended

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

(in millions) April 29, 2023 April 30, 2022 April 29, 2023 April 30, 2022

Net income including noncontrolling interests $ 8 $ 68 $ 97 $ 213

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

Provision for income taxes 9 25 14 24

(Benefit) provision for income taxes (1) 29 13 53

Depreciation and amortization 77 72 224 210

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LIFO charge 33 72 83 102

Restructuring, acquisition and integration related expenses

Restructuring, acquisition and integration related (benefits) expenses

Loss (gain) on sale of assets (1)

4 (88) — (87)

Multiemployer pension plan withdrawal benefit (2)

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Adjusted EBITDA $ 159 $ 196 $ 547 $ 616

(1) During 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 26-Week Period Ended

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

Adjusted EBITDA (previously reported definition) $ 201 $ 390

LIFO charge 19 30

Adjusted EBITDA (current definition) $ 220 $ 420

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

(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.

(4) Reflects third-party costs primarily 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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Customer Channel (1)

2023 January 29,

2022 $ % January 28,

2023 January 29,

2023 April 30,

2022 $ % April 29,

2023 April 30,

Chains $ 3,129 $ 3,111 $ 18 0.6 % $ 9,675 $ 9,436 $ 239 2.5 %

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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.

Second Quarter

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

Third Quarter

Our Net sales for the third quarter of fiscal 2023 increased approximately 3.7% from the third quarter of fiscal 2022.

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

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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.

Retail Net sales decreased primarily due to a 2.0% decrease in identical store sales from lower volume, offset by higher average basket sizes driven by inflation.

Other Net sales increased primarily due to higher Military sales.

Our Net sales for fiscal 2023 year-to-date increased approximately 5.5% from fiscal 2022 year-to-date.

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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 eCommerce sales.

Retail Net sales increased primarily due to new store sales and a 0.3% increase in identical store sales from higher average basket sizes driven by inflation, partially offset by lower volume.

Other Net sales increased primarily due to higher Military and eCommerce sales.

Cost of Sales and Gross Profit

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 decreased $12 million, or 1.2%, to $1,000 million for the third quarter of fiscal 2023, from $1,012 million for the third quarter of fiscal 2022.

Our gross profit as a percentage of Net sales decreased to 13.3% for the third quarter of fiscal 2023 compared to 14.0% for the third quarter of fiscal 2022.

The LIFO charge was $33 million and $72 million in the third quarter of fiscal 2023 and 2022, respectively.

E xcluding the non-cash LIFO charge, gross profit rate was 13.8% of Net sales and 15.0% of Net sales for the third quarter of fiscal 2023 and 2022 , respectively.

The decrease in gross profit rate, excluding the LIFO charge, was primarily driven by the volatile macroeconomic environment, which led to lower inflationary benefits and reduced procurement gains.

Gross profit also reflects higher levels of shrink and costs related to operational improvements.

Our gross profit increased $36 million, or 1.2% to $3,165 million for fiscal 2023 year-to-date, from $3,129 million for fiscal 2022 year-to-date.

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Excluding the non-cash LIFO charge, gross profit rate was 14.2% 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.

The decrease in gross profit rate, excluding LIFO charge, was driven by reduced levels of procurement gains due to the decelerating rate of inflation and the volatile macroeconomic environment, lower inventory gains, higher shrink expense and customer mix.

Operating Expenses

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 decreased $2 million, or 0.2%, to $967 million, or 12.9% of Net sales, for the third quarter of fiscal 2023 compared to $969 million, or 13.4% of Net sales, for the third quarter of fiscal 2022.

Operating expenses in the third quarter of fiscal 2023 included a benefit of approximately $20 million resulting from the reversal of previously accrued incentive compensation expense driven by underperformance compared to targets, which was partially offset by higher occupancy-related costs.

Operating expenses in the third quarter of fiscal 2022 included approximately $15 million in incentive compensation expense.

Operating expenses increased $124 million, or 4.4%, to $2,969 million, or 13.0% of Net sales, for fiscal 2023 year-to-date compared to $2,845 million, or 13.1% 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.

The decrease in operating expenses as a percent of Net sales was primarily driven by approximately $40 million lower incentive compensation expense in fiscal 2023 year-to-date, partially offset by higher occupancy-related costs.

Loss (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 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 $90 million to $33 million for the third quarter of fiscal 2023, compared to $123 million for the third quarter of fiscal 2022.

The decrease in operating income was primarily driven by a decrease in gain on sale of assets and gross profit, partially offset by a decrease in operating expenses as described above.

Reflecting the factors described above, Operating income decreased $160 million, to $195 million for fiscal 2023 year-to-date, compared to $355 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.

The decrease in operating income was primarily driven by an increase in operating expenses in excess of an increase in gross profit and a decrease in gain on sale of assets as described above.

Interest Expense, Net

13-Week Period Ended 39-Week Period Ended

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

(in millions) April 29, 2023 April 30, 2022 April 29, 2023 April 30, 2022

Interest expense on long-term debt, net of capitalized interest $ 33 $ 32 $ 98 $ 95

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Loss on debt extinguishment — 1 3 7

Interest income (1) — (1) —

Interest expense, net $ 35 $ 37 $ 109 $ 121

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 decrease in interest expense, net, in the third quarter of fiscal 2023 compared to the third quarter of fiscal 2022 was primarily driven by lower average debt balances and higher interest income, partially offset by higher interest rates.

The decrease in interest expense, net 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.

(Benefit) Provision for Income Taxes

The effective tax rate for the third quarter of fiscal 2023 was a benefit rate of 14.3% compared to an expense rate of 29.9% for the third quarter of fiscal 2022.

The change was primarily driven by the impact of a partnership investment entered into in the third quarter of fiscal 2023, and the reduction in pre-tax income during the third quarter of fiscal 2023.

The effective tax rate for fiscal 2023 year-to-date was 11.8% compared to 19.9% 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.

The change was driven primarily by the impact of a partnership investment entered into in the third quarter of fiscal 2023, and the reduction in pre-tax income in fiscal 2023 year-to-date as compared to fiscal 2022 year-to-date.

This was partially offset by the lower discrete tax benefits in fiscal 2023 year-to-date related to the vesting of employee stock awards as compared to fiscal 2022 year-to-date.

Net Income Attributable to United Natural Foods, Inc.

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

was $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.

was $7 million, or $0.12 per diluted common share, for the third quarter of fiscal 2023, compared to $67 million, or $1.10 per diluted common share, for the third quarter of fiscal 2022.

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

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The following tables set forth Net sales and Adjusted EBITDA by segment for the periods indicated.

Adjusted EBITDA by segment results for the third quarter of fiscal 2023 and fiscal 2023 year-to-date reflect adjustments to expected incentive compensation expense discussed in Note 13—Business Segments.

13-Week Period Ended 39-Week Period Ended

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

(in millions) April 29, 2023 April 30, 2022 Change April 29, 2023 April 30, 2022 Change

Wholesale $ 7,235 $ 6,977 $ 258 $ 22,008 $ 20,843 $ 1,165

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Wholesale $ 143 $ 171 $ (28) $ 451 $ 522 $ (71)

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

28 32 (4) 48 54 (6)

Retail 18 14 4 66 68 (2)

Other (1) 11 (12) 33 27 6

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Total Adjusted EBITDA $ 159 $ 196 $ (37) $ 547 $ 616 $ (69)

(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 $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.

Third Quarter

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

Retail’s Net sales decreased primarily due to a 2.0% decrease in identical store sales from lower volume, offset by higher average basket sizes driven by inflation.

The decrease in eliminations Net sales was primarily due to a decrease in Wholesale to Retail sales, which are eliminated upon consolidation.

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

Retail’s Net sales increased primarily due to new store sales and a 0.3% increase in identical store sales from higher average basket sizes driven by inflation, partially offset by lower volume.

Adjusted EBITDA

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.

Third Quarter

Wholesale’s Adjusted EBITDA decreased 16.4% for the third quarter of fiscal 2023 as compared to the third quarter of fiscal 2022.

The decrease was driven by a gross profit decline excluding the LIFO charge, partially offset by a decrease in operating expenses.

Wholesale’s Gross profit decrease excluding the LIFO charge for the third quarter of fiscal 2023 was $49 million with a gross profit rate decrease of approximately 114 basis points primarily driven by the volatile macroeconomic environment, which led to lower inflationary benefits and reduced procurement gains.

Gross profit also reflects higher levels of shrink and costs related to operational improvements.

Wholesale’s Operating expense decreased $21 million, which excludes depreciation and amortization, share-based compensation and other adjustments as outlined in Note 13—Business Segments.

Wholesale’s operating expense rate decreased 65 basis points primarily due to a benefit of approximately $23 million in the third quarter of fiscal 2023 resulting from the reversal of previously accrued incentive compensation expense driven by underperformance compared to targets, which was partially offset by higher occupancy-related costs.

Wholesale’s operating expenses in the third quarter of fiscal 2022 included approximately $7 million in incentive compensation expense.

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

Retail’s Adjusted EBITDA increased 28.6% for the third quarter of fiscal 2023 as compared to the third quarter of fiscal 2022.

The increase was driven by a benefit resulting from the reversal of previously accrued incentive compensation expense driven by underperformance compared to targets, compared to expense in the third quarter of fiscal 2022, partially offset by higher operating expenses primarily due to 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 $2 million compared to the second quarter of fiscal 2022.

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

Other Adjusted EBITDA decreased $12 million in the third quarter of fiscal 2023 primarily due to adjustments to accrued incentive compensation.

Wholesale’s Adjusted EBITDA decreased 13.6% 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 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 Gross profit increase excluding the LIFO charge for fiscal 2023 year-to-date was $13 million with a gross profit rate decrease of approximately 63 basis points driven by reduced levels of procurement gains due to the decelerating rate of inflation and the volatile macroeconomic environment, lower inventory gains, higher shrink expense and customer mix.

Wholesale’s Operating expense increased $84 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 7 basis points primarily driven by higher occupancy costs in fiscal 2023 year-to-date.

Wholesale’s operating expense rate decreased 17 basis points due to lower incentive compensation expense, partially offset by higher occupancy costs in fiscal 2023 year-to-date.

Wholesale’s depreciation and amortization expense increased $6 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 decreased 2.9% for fiscal 2023 year-to-date as compared to fiscal 2022 year-to-date, driven primarily 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.

LIQUIDITY AND CAPITAL RESOURCES

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

• Total liquidity as of April 29, 2023 was $1,615 million and consisted of the following:

◦ Unused credit under our $2,600 million asset-based revolving credit facility (the “ABL Credit Facility”) was $1,577 million, which decreased $50 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 $38 million, which decreased $6 million from $44 million as of July 30, 2022.

• 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.

• Our total debt decreased $91 million to $2,032 million as of April 29, 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 $143 million to $1,237 million as of April 29, 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 lower liabilities related to accrued compensation and benefits and an increase in prepaid expenses and other current assets.

• In the second quarter of fiscal 2023, we monetized certain receivables previously presented 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 initial net cash proceeds of $253 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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We currently do not pay a dividend on our common stock.

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

In addition, we are limited in the aggregate amount of dividends that we may pay under the terms of our Term Loan Facility, ABL Credit Facility and our $500 million of unsecured 6.750% senior notes due October 15, 2028 (the “Senior Notes”).

Subject to certain limitations contained in our debt agreements and as market conditions warrant, we may from time to time refinance indebtedness that we have incurred, including through the incurrence or repayment of loans under existing or new credit facilities or the issuance or repayment of debt securities.

1 unchanged sentence

Long-Term Debt

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.

During fiscal 2023 year-to-date, we borrowed a net $39 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 presented within accounts receivable, and from asset sales.

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

7 unchanged sentences

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 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.

As of April 29, 2023, we had an aggregate of $800 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 September 2023 and October 2025.

The fair value of these interest rate derivatives represent a current asset of $15 million and a long-term asset of $2 million as of April 29, 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 January 28, 2023, we had fixed price fuel contracts and foreign currency forward agreements outstanding.

As of April 29, 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.

9 unchanged sentences

39-Week Period Ended

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

Net cash provided by operating activities

(in millions) April 29, 2023 April 30, 2022 Change

Net cash provided by (used in) operating activities

$ 402 $ (31) $ 433

Net cash used in investing activities

Net cash (used in) provided by investing activities

(211) 45 (256)

Net cash (used in) provided by financing activities

Net cash used in financing activities

(197) (7) (190)

2 unchanged sentences

Cash and cash equivalents, at end of period $ 38 $ 48 $ (10)

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 provided by operating activities in fiscal 2023 year-to-date compared to fiscal 2022 year-to-date was primarily due to lower levels of cash utilized in working capital, including the monetization of certain receivables in fiscal 2023 year-to-date discussed above, pursuant to a purchase agreement with a third-party financial institution, and lower cash used in inventory purchases driven by higher purchasing levels intended to offset supply chain limitations that occurred in fiscal 2022 year-to-date, partially offset by lower cash generated from net income.

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 lower proceeds received from the sale of the Riverside, California distribution center in fiscal 2022 year-to-date and higher capital expenditures in fiscal 2023 year-to-date, as described above.

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.

34 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”).

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.

Under the 2022 Repurchase Program, we repurchased approximately 368,000 shares of our common stock for a total cost of $12 million in the third quarter of fiscal 2023 and approximately 1,098,000 shares of our common stock for a total cost of $41 million in fiscal 2023 year-to-date.

As of April 29, 2023, we had $159 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.

We may implement the 2022 Repurchase Program pursuant to a plan or plans meeting the conditions of Rule 10b5-1 under the Exchange Act.

Critical Accounting Policies and Estimates

There were no material changes to our critical accounting policies during the period covered by this Quarterly Report on Form 10-Q.

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

Critical Accounting Estimates

There were no material changes to our critical accounting estimates during the period covered by this Quarterly Report on Form 10-Q.

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

Overall product sales are fairly balanced throughout the year, although demand for certain products of a seasonal nature may be influenced by holidays, changes in seasons or other annual events.

3 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