What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-09-26 compared with 2022-09-27 · 168 added, 213 removed, 345 unchanged (52% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and the notes thereto, “Risk Factors” included in Part I, Item IA, “Forward-looking Statements” and other risks described elsewhere in this Annual Report.

FORWARD-LOOKING STATEMENTS

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and the notes thereto, “Risk Factors” included in Part I, Item IA, “Cautionary Note Regarding Forward-Looking Statements” and other risks described elsewhere in this Annual Report.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act, that involve substantial risks and uncertainties.

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• our dependence on principal customers;

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

• the impact and duration of the COVID-19 pandemic;

• the relatively low margins of our business, which are sensitive to inflationary and deflationary pressures and intense competition, including as a result of the continuing consolidation of retailers and the growth of consumer choices for grocery and consumable purchases;

• our ability to realize the anticipated benefits of our transformation initiatives;

• changes in relationships with our suppliers;

• 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;

• 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;

• our ability to realize anticipated benefits of our acquisitions;

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

• increased competition in our industry, including as a result of continuing consolidation of retailers and the growth of chains, direct distribution by large retailers and the growth of online distributors;

• our ability to maintain sufficient volume in our wholesale segment to support our operating infrastructure;

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

• our ability to access additional capital;

• increases in healthcare, pension and other costs under our and multiemployer benefit plans;

• the potential for additional asset impairment charges;

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

• 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;

• union-organizing activities that could cause labor relations difficulties and increased costs;

• the potential for additional asset impairment charges;

• our ability to maintain food quality and safety;

• volatility in fuel costs.

• volatility in foreign exchange rates;

• our ability to identify and successfully complete asset or business acquisitions.

You should carefully review the risks described under “Risk Factors” included in Part I, Item 1A, as well as any other cautionary language in this Annual Report, as the occurrence of any of these events could have an adverse effect, which may be material, on our business, results of operations, financial condition or cash flows.

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Our diversified customer base includes over 30,000 customer locations ranging from some of the largest grocers in the country to smaller independents as well.

We offer approximately 260,000 products consisting of national, regional and private label brands grouped into six product categories:

We offer approximately 250,000 products consisting of national, regional and private label brands grouped into the following main product categories:

grocery and general merchandise;

perishables and frozen foods;

nutritional supplements and sports nutrition;

bulk and foodservice products;

and personal care items.

We believe we are North America’s premier wholesaler with 56 distribution centers and warehouses representing approximately 30 million square feet of warehouse space.

frozen foods;

wellness and personal care items;

and bulk and foodservice products.

We believe we are North America’s premier grocery wholesaler with 55 distribution centers and warehouses representing approximately 30 million square feet of warehouse space.

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.

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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 Business in Part I.

Item 1 of this Annual Report.

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

As our financial leverage has declined over time, it also 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 further 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 the key drivers for new customer growth will be the benefits of our significant scale, product and service offerings and nationwide footprint.

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

Our enterprise-wide business transformation strategy consists of four areas, detailed under “Business” included in Part I, Item 1 of this Annual Report, which 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 are also working on near-term initiatives to help improve profitability while we execute our longer-term strategy.

These include actioning administrative structure efficiencies, reprioritizing our selling and administrative spending, optimizing our SKU assortment as well as reviewing commercial contracts in collaboration with our customers and suppliers.

We expect to continue to use available capital to re-invest in our business and we remain committed to improving our financial leverage and reducing outstanding debt over the long term.

Since the close of our 2018 acquisition of Supervalu, we have reduced net debt by $1.4 billion.

We believe we can enhance our profitability and accelerate our growth through our transformation efforts, which we expect will improve our cost structure, increase sales of products and services, and position us to 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 value creation will be improved efficiency through the automation and optimization of our supply chain, as well as new customer growth associated with the benefits of our significant scale, product and service offerings and nationwide footprint.

Trends and Other Factors Affecting our Business

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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 in the future.

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 input costs of our manufacturers impacted prices of products we procured.

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 lessens any impact of shifts in consumer and industry trends in grocery product mix.

We continued to experience a tight labor market for our warehouse and driver associates in fiscal 2022, which has caused additional reliance on third-party resources, incremental hiring and increases in wages, all of which 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.

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 believe that changes in work being done outside of the traditional office setting will continue to contribute to more food being consumed at home.

The impact of the pandemic, also drove growth in eCommerce utilization by grocery consumers.

We have benefited from this trend through the growth of our traditional eCommerce customers, our online marketplace connecting suppliers and retailers, and our EasyOptions website, which directly services non-traditional customers.

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.

For example, we experienced volatility in our energy operating costs, and fluctuating 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 further shifts in consumer and industry trends in grocery product mix.

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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Wholesale Distribution Center Network

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.

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.

In fiscal 2022, our Allentown, Pennsylvania distribution center began operations, with a capacity of 1.3 million square feet to service customers in the surrounding geographic area.

We incurred start-up costs and operating losses, as the volume in this facility ramped up to its operating capacity.

We incurred start-up costs and continue to incur operating losses, as the volume in this facility continues to ramp up to its operating capacity.

Retail Operations

We currently operate 73 continuing operations Retail grocery stores, including 54 Cub Foods corporate stores and 19 Shoppers Food Warehouse stores.

We currently operate 78 retail grocery stores, including 54 Cub Foods corporate stores and 24 Shoppers Food Warehouse stores.

In addition, we supply another 26 Cub Foods stores operated by our Wholesale customers through franchise and equity ownership arrangements.

We operate 81 pharmacies primarily within our stores we operate and the stores of our franchisees.

We operate 81 pharmacies primarily within the stores we operate and the stores of our franchisees.

In addition, we operate 25 “Cub Wine and Spirit” and “Cub Liquor” stores.

We’re committed to investing in our Retail segment in areas such as customer-facing merchandising initiatives, physical facilities, technology, and operational tools.

Cub Foods and Shoppers Food Warehouse also invested in improving the customer and associate experience through express remodels focused on customer facing elements;

14 projects were completed in fiscal 2022 with a majority finishing in the fourth quarter of fiscal 2022.

Impact of Inflation

We plan to continue to invest in our Retail segment in areas such as customer-facing merchandising initiatives, physical facilities, technology and operational tools.

Cub Foods and Shoppers Food Warehouse anticipate continued investment in improving the customer and associate experience through express remodels focused on customer facing elements.

Impact of Product Cost Inflation

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

In the aggregate across our businesses, including the mix of products, management estimates our businesses experienced product cost inflation of approximately six percent in fiscal 2022.

In the aggregate across our businesses, including the mix of products, management estimates our businesses experienced product cost inflation of approximately nine percent in fiscal 2023.

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

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Absent any changes in units sold or the mix of units sold, inflation generally has the effect of increasing sales.

Under the last-in, first out (“LIFO”) method of inventory accounting, product cost increases are recognized within Cost of sales based on expected year-end inventory quantities and costs, which has the effect of decreasing Gross profit and the carrying value of inventory during periods of inflation.

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 generally 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 includes 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.

In addition, as discussed above, we have experienced higher costs of services from labor, transportation and other services expenses.

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

These decreases negatively impacted our gross profit rate when comparing fiscal 2023 to fiscal 2022.

Composition of Consolidated Statements of Operations and Business Performance Assessment

Our Net sales consist primarily of product sales of natural, organic, specialty, produce and conventional grocery and non-food products, and support services revenue from retailers, adjusted for customer volume discounts, vendor incentives when applicable, returns and allowances, and professional services revenue.

Our Net sales consist primarily of product sales of natural, organic, specialty, produce, and conventional grocery and non-food products, adjusted for customer volume discounts, vendor incentives when applicable, returns and allowances, and professional services revenue.

Net sales also include amounts charged by us to customers for shipping and handling and fuel surcharges.

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The principal components of our Cost of sales include the amounts paid to suppliers for product sold, plus transportation costs necessary to bring the product to, or move product between, our distribution centers and retail stores, partially offset by consideration received from suppliers in connection with the purchase or promotion of the suppliers’ products.

Our gross margin may not be comparable to other similar companies within our industry that may include all costs related to their distribution network in their costs of sales rather than as operating expenses.

Operating expenses

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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.

Loss (Gain) on Sale of Assets and Other Asset Charges

Loss (gain) on sale of assets and other asset charges primarily includes losses (gains) on sales of assets, losses on sales of financial assets, and asset impairments.

Net periodic benefit income, excluding service cost

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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, 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 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 four in the table below and Note 16—Business Segments in Part II, Item 8 of this Annual Report for additional information regarding the impact of the change in definition 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 (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, Loss (gain) on sale of assets and other asset charges, certain legal charges and gains, certain other non-cash charges or other items, as determined by management, plus Adjusted EBITDA of discontinued operations calculated in a manner consistent with the results of continuing operations, outlined above.

The changes to the definition of Adjusted EBITDA from prior periods reflect changes to line item references in our Consolidated Financial Statements, which do 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 tables for the change in segment profit measurement for Adjusted EBITDA as discussed in Note 16—Business Segments within Part II, Item 8 of this Annual Report.

Increase (Decrease)

(in millions) 2023

2023 Compared to 2022

2022 Compared to 2021

Net sales $ 30,272 $ 28,928 $ 26,950 $ 1,344 $ 1,978

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Operating expenses 3,973 3,825 3,593 148 232

Goodwill impairment charges — — 425 — (425)

Restructuring, acquisition and integration related expenses 8 21 56 (13) (35)

(Gain) loss on sale of assets (87) (4) 18 (83) (22)

Operating income (loss) 423 294 (193) 129 487

Loss (gain) on sale of assets and other asset charges 30 (87) (4) 117 (83)

Operating income 120 423 294 (303) 129

Net periodic benefit income, excluding service cost (29) (40) (85) 11 45

Interest expense, net 144 155 204 (11) (49)

Other, net (2) (8) (4) 6 (4)

Income (loss) from continuing operations before income taxes 310 183 (342) 127 525

Provision (benefit) for income taxes 56 34 (91) 22 125

Net income (loss) from continuing operations 254 149 (251) 105 400

Income (loss) from discontinued operations, net of tax — 6 (18) (6) 24

Net income (loss) including noncontrolling interests 254 155 (269) 99 424

Other income, net (2) (2) (8) — 6

Income from continuing operations before income taxes 7 310 183 (303) 127

(Benefit) provision for income taxes (23) 56 34 (79) 22

Net income from continuing operations 30 254 149 (224) 105

Income from discontinued operations, net of tax — — 6 — (6)

Net income including noncontrolling interests 30 254 155 (224) 99

Less net income attributable to noncontrolling interests (6) (6) (6) — —

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

Net income attributable to United Natural Foods, Inc.

$ 24 $ 248 $ 149 $ (224) $ 99

Adjusted EBITDA $ 640 $ 829 $ 770 $ (189) $ 59

The following table reconciles Adjusted EBITDA to Net income (loss) from continuing operations and to Income (loss) from discontinued operations, net of tax.

The following table reconciles Net income from continuing operations and Income from discontinued operations, net of tax to Adjusted EBITDA.

(in millions) 2023

Net income (loss) from continuing operations $ 254 $ 149 $ (251)

Adjustments to continuing operations net income (loss):

Net income from continuing operations $ 30 $ 254 $ 149

Adjustments to continuing operations net income:

Less net income attributable to noncontrolling interests (6) (6) (6)

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Interest expense, net 144 155 204

Other, net (2) (8) (4)

Provision (benefit) for income taxes (2)

Other income, net (2) (2) (8)

(Benefit) provision for income taxes

Depreciation and amortization 304 285 285

Share-based compensation 38 43 49

Goodwill impairment charges (3)

LIFO charge 119 158 24

Restructuring, acquisition and integration related expenses (2)

(Gain) loss on sale of assets (6)

Multiemployer pension plan withdrawal (benefit) charges (7)

Notes receivable charges (8)

Legal reserve charge, net of settlement income (9)

Loss (gain) on sale of assets and other asset charges (3)

Multiemployer pension plan withdrawal charges (benefit) (4)

Other retail expense (5)

Business transformation costs (6)

Adjusted EBITDA of continuing operations 640 829 766

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Adjusted EBITDA $ 640 $ 829 $ 770

Income (loss) from discontinued operations, net of tax (11)

$ — $ 6 $ (18)

Adjustments to discontinued operations net income (loss):

Income from discontinued operations, net of tax (7)

Adjustments to discontinued operations net income:

Benefit for income taxes — — (1)

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(1) Fiscal 2021 includes a postretirement settlement gain of $17 million associated with the termination of remaining corporate plans.

Fiscal 2020 includes a lump sum defined benefit pension plan settlement expense of $11 million associated with the acceleration of a portion of the accumulated unrecognized actuarial loss as a result of the lump sum settlement payments.

(2) Fiscal 2020 includes the tax benefit from the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, which includes the impact of tax loss carrybacks to 35% tax years allowed under the CARES Act.

(3) Fiscal 2020 primarily reflects a goodwill impairment charge attributable to a reorganization of our reporting units and a sustained decrease in market capitalization and enterprise value of the Company, resulting in a decline in the estimated fair value of the U.S.

Wholesale reporting unit.

In addition, this charge includes a goodwill finalization charge attributable to the Supervalu acquisition and an asset impairment charge.

Refer to Note 6—Goodwill and Intangible Assets, Net in Part II, Item 8 of this Annual Report for additional information.

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

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

(in millions) 2021

Adjusted EBITDA of continuing operations (previously reported definition) $ 742 $ 663

LIFO charge 24 18

Adjusted EBITDA of continuing operations (current definition) 766 681

Adjusted EBITDA of discontinued operations 4 10

Adjusted EBITDA (current definition) $ 770 $ 691

(5) Fiscal 2022 and fiscal 2021 primarily reflects costs associated with advisory and transformational activities to position our business for further value-creation.

(2) Fiscal 2023 primarily reflects severance costs.

Fiscal 2022 and fiscal 2021 primarily reflects costs associated with advisory and transformational activities to position our business for further value-creation related to integration.

In addition, fiscal 2021 includes costs associated with distribution center consolidations.

Fiscal 2020 primarily reflects Shoppers asset impairment charges, closed property and distribution center impairment charges and costs, and administrative fees associated with integration activities.

Refer to Note 4—Restructuring, Acquisition and Integration Related Expenses in Part II, Item 8 of this Annual Report for additional information.

(3) Fiscal 2023 includes a $25 million intangible asset impairment charge attributable to a rationalization of our brands portfolio in an effort to focus on our core private brand offerings.

Refer to Note 6—Goodwill and Intangible Assets, Net in Part II, Item 8 of this Annual Report for additional information.

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

Fiscal 2020 primarily reflects a $50 million accumulated depreciation and amortization charge related to the requirement to move Retail from discontinued operations to continuing operations, partially offset by $32 million of gains on the sale of distribution centers and other assets.

(7) Fiscal 2022 reflects an adjustment to multiemployer withdrawal charge estimates.

(4) Fiscal 2023 and fiscal 2022 reflect adjustments to multiemployer withdrawal charge estimates.

Fiscal 2021 includes charges related to withdrawal liabilities from three Retail multiemployer pension plans.

(8) Reflects reserves and charges for notes receivable issued by Supervalu prior to our acquisition to finance the purchase of stores by its customers.

(9) Reflects a charge to settle a legal proceeding and income received to settle a separate legal proceeding.

(10) Reflects expenses associated with event-specific damages to certain retail stores.

(5) Fiscal 2023 reflects store closure charges and costs, operational wind-down and inventory charges.

Fiscal 2022 and fiscal 2021 r eflect expenses associated with event-specific damages to certain retail stores.

(6) 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.

(7) We believe the inclusion of discontinued operations results within Adjusted EBITDA provides investors a meaningful measure of performance.

(12) Amounts represent store closure charges and costs, operational wind-down and inventory charges, and asset impairment charges related to discontinued operations.

Fiscal 2021 also reflects income related to a severance benefit.

(8) Amounts represent store closure charges and costs, operational wind-down and inventory charges, asset impairment charges related to discontinued operations and income related to a severance benefit.

The following includes a comparison of our consolidated results of operations, our segment results and financial position for fiscal years 2023 and 2022.

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Our Net sales for fiscal 2023 increased 4.6% from fiscal 2022.

The increase in Net sales for fiscal 2022 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 reduced unit sales growth.

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, partially offset by supply chain challenges and reduced unit sales growth.

Independent retailers Net sales increased primarily due to sales under a 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, partially offset by supply chain challenges and reduced unit sales growth.

Supernatural Net sales increased primarily due to growth in existing store sales, including the supply of new product categories previously impacted by the pandemic and new fresh categories, such as bulk and ingredients used for prepared foods, inflation, and increased sales to new stores.

Retail’s Net sales increased primarily due to a 0.9% increase in identical store sales from higher average basket sizes, including an increase from higher product costs.

Other Net sales increased primarily due to a $93 million increase in sales to eCommerce customers.

The increase in Net sales for fiscal 2023 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 increased sales under a supply agreement with a new customer within the East 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, partially offset by a decrease in units sold to existing stores.

Retail Net sales increased primarily due to inflation and new store sales, partially offset by lower volume.

Identical store sales decreased 0.9%.

Other Net sales increased primarily due to a $49 million increase in sales to Military customers.

Eliminations Net sales primarily relate to Wholesale’s sales to Retail.

Cost of Sales and Gross Profit

Our Gross profit increased $243 million, or 6.2%, to $4,182 million in fiscal 2022, from $3,939 million in fiscal 2021.

Our Gross profit as a percentage of Net sales decreased slightly to 14.5% in fiscal 2022 compared to 14.6% in fiscal 2021.

Our Gross profit decreased $51 million, or 1.2%, to $4,131 million in fiscal 2023, from $4,182 million in fiscal 2022.

Our Gross profit as a percentage of Net sales decreased to 13.6% in fiscal 2023 compared to 14.5% in fiscal 2022.

The LIFO charge was $119 million and $158 million in fiscal 2023 and fiscal 2022, respectively.

Excluding the non-cash LIFO charge, gross profit rate was 14.0% of Net sales and 15.0% of Net sales for fiscal 2023 and fiscal 2022, respectively.

The increase in the Gross profit rate, excluding the LIFO charge, was driven by improvements in the Wholesale segment margin rate, including the impact of inflation and the Company’s efficiency initiatives, partially offset by approximately 60 basis points from changes in certain larger customer mix.

The decrease in the gross profit rate, excluding the LIFO charge, was primarily driven by lower levels of procurement gains resulting from decelerating inflation, higher shrink expense and customer mix.

Operating Expenses

Operating expenses increased $148 million, or 3.9%, to $3,973 million, or 13.1% of Net sales, in fiscal 2023 compared to $3,825 million, or 13.2% of Net sales, in fiscal 2022.

Operating expenses in fiscal 2022 included an $8 million Retail multiemployer pension plan withdrawal benefit, compared to a $63 million Retail multiemployer pension plan withdrawal charge in fiscal 2021 discussed below.

Excluding the multiemployer pension plan withdrawal impacts in both periods, Operating expenses were 13.3% and 13.1% in fiscal 2022 and 2021, respectively.

The remaining 20 basis point increase in Operating expenses as a percent of Net sales was primarily driven by continued investments in servicing our customers, which led to approximately 50 basis points of higher transportation expenses and distribution labor costs in fiscal 2022, higher occupancy costs, 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 the non-recurrence of distribution center start-up and consolidation costs incurred in the Pacific Northwest last year.

In fiscal 2021, our Retail optimization efforts included updating our benefit plan offerings to a defined contribution plan as a replacement for three multiemployer pension plans to which we contributed pursuant to Cub Foods collective bargaining agreements.

In fiscal 2021, we withdrew from participating in these Retail multiemployer pension plans, resulting in a $63 million withdrawal charge.

This estimated withdrawal liability was adjusted to $55 million in fiscal 2022, resulting in the benefit discussed above.

It is possible we could incur withdrawal liabilities for certain additional multiemployer pension plan obligations in the future as we negotiate new collective bargaining agreements with a number of our unions in normal course.

The decrease in Operating expenses as a percentage of Net sales was primarily driven by approximately $52 million lower incentive compensation expense in fiscal 2023 resulting from underperformance compared to targets.

Excluding incentive compensation expense, Operating expenses as a percentage of Net sales were 13.1% and 13.0% in fiscal 2023 and 2022, respectively.

The remaining increase in Operating expenses as a percent of Net sales was primarily driven by higher occupancy-related costs.

Restructuring, Acquisition and Integration Related Expenses

Restructuring, acquisition and integration related expenses were $21 million for fiscal 2022, which primarily included integration costs associated with transformational and advisory activities to position our business for further value creation.

Expenses for fiscal 2021 were $56 million, which included $50 million of integration costs primarily associated with advisory and transformational activities to position our business for further value creation following the Supervalu acquisition and $6 million of closed property charges.

Gain on Sale of Assets

Gain on sale of assets was $87 million in fiscal 2022, which increased $83 million from $4 million in fiscal 2021.

During 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 fiscal 2022 as a result of the transactions, which primarily reflects the pre-tax net proceeds.

Restructuring, acquisition and integration related expenses were $8 million for fiscal 2023, compared to $21 million for fiscal 2022.

Fiscal 2022 expenses primarily included integration costs associated with transformational and advisory activities to position our business for further value creation.

Loss (Gain) on Sale of Assets and Other Asset Charges

Loss on sale of assets and other asset charges was $30 million in fiscal 2023, compared to a gain on sale of assets of $87 million in fiscal 2022.

Fiscal 2023 includes a $25 million intangible asset impairment charge related to a rationalization of our brands portfolio in an effort to focus on our core private brand offerings.

Fiscal 2022 primarily reflects the $87 million gain on sale of our Riverside, California distribution center.

Operating Income

Reflecting the factors described above, Operating income increased $129 million to $423 million in fiscal 2022, from $294 million in fiscal 2021.

The increase in Operating income was primarily driven by an increase in Gross profit, Gain on sale of assets and lower Restructuring, acquisition and integration related expenses, partially offset by an increase in Operating expenses.

Reflecting the factors described above, Operating income decreased $303 million to $120 million in fiscal 2023, from $423 million in fiscal 2022.

The decrease in Operating income was primarily driven by an increase in Operating expenses, a loss on sale of assets and other asset charges in fiscal 2023 compared to a gain in fiscal 2022 as described above, and a decrease in Gross profit, partially offset by lower Restructuring, acquisition and integration related expenses.

Net Periodic Benefit Income, Excluding Service Cost

Net periodic benefit income, excluding service cost decreased $11 million to $29 million in fiscal 2023, from $40 million in fiscal 2022.

The decrease in Net periodic benefit income, excluding service cost was primarily driven by $22 million of lower income from expected returns on plan assets from a higher target investment allocation to fixed income assets in 2022 and a $17 million settlement gain for the purchase of an irrevocable annuity to settle participants’ post-employment obligations in fiscal 2021.

The decrease in Net periodic benefit income, excluding service cost was primarily driven by higher interest costs from a higher discount rate utilized in the measurement of pension liabilities, partially offset by $13 million of higher income from expected returns on plan assets.

Interest Expense, Net

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Interest expense, net $ 144 $ 155 $ (11)

The decrease in interest expense on long-term debt, net of capitalized interest, for fiscal 2022 compared to fiscal 2021 was primarily driven by lower outstanding debt balances and lower net interest expense related to our portfolio of interest rate swaps.

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

Refer to Note 9—Long-Term Debt in Part II, Item 8 of this Annual Report for further information.

Provision for Income Taxes

The effective income tax rate for continuing operations was an expense of 18.1% compared to an expense of 18.6% in fiscal 2022 and 2021, respectively.

The decrease in Interest expense, net for fiscal 2023 compared to fiscal 2022 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 income tax rate for continuing operations was a benefit rate of 328.6% in fiscal 2023 compared to an expense rate of 18.1% in fiscal 2022.

For fiscal 2023, the effective tax rate was impacted by solar credits, including the tax credit impact of a fiscal 2023 investment in an equity method partnership and solar credits associated with a solar array installation at the Company’s Howell Township, New Jersey facility.

The effective tax rate was also impacted by the recognition of previously unrecognized tax benefits and excess tax deductions attributable to share-based compensation.

The combined impact of these fiscal 2023 tax benefits exceeded pre-tax income, generating an overall tax benefit rate for fiscal 2023.

For fiscal 2022, the effective tax rate was reduced by the impact of discrete tax benefits related to employee stock awards and the release of unrecognized tax positions, partially offset by non-deductible executive compensation.

For fiscal 2021, the effective tax rate was reduced by solar and employment tax credits, including the tax credit impact of a fiscal 2021 investment in an equity method partnership, the recognition of previously unrecognized tax benefits, excess tax deductions attributable to share-based compensation and inventory deductions, as well as the impact of favorable return-to-provision adjustments.

Income from Discontinued Operations, Net of Tax

The results of discontinued operations for fiscal 2021 reflect Net sales of $42 million for which we recognized $14 million of Gross profit and $9 million of Income from discontinued operations, net of tax.

Discontinued operations results of operations in fiscal 2022 were insignificant.

Refer to Note 18—Discontinued Operations in Part II, Item 8 of this Annual Report for additional information.

Net Income Attributable to United Natural Foods, Inc.

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(in millions) 2023

2023 Compared to 2022

2022 Compared to 2021

Wholesale $ 29,142 $ 27,824 $ 25,873 $ 1,318 $ 1,951

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Wholesale $ 540 $ 696 $ 677 $ (156) $ 19

$ 696 $ 677 $ 610 $ 19 $ 67

Retail 70 98 98 (28) —

Other 31 44 (10) (13) 54

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Total continuing operations Adjusted EBITDA $ 640 $ 829 $ 766 $ (189) $ 63

(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.

The effect of the revision increased Adjusted EBITDA for Wholesale and Retail by $23 million and $2 million in fiscal 2021, respectively, decreased Adjusted EBITDA of Other by $1 million in fiscal 2021, and increased Adjusted EBITDA of Wholesale and Retail in fiscal 2020 by $17 million and $1 million, respectively.

Wholesale’s Net sales increased in fiscal 2022 as compared to fiscal 2021 primarily due to growth in sales to existing customers, including an increase from higher product costs, in Independent retailers, Supernatural and Chains, as discussed in Results of Operations- Fiscal year ended July 30, 2022 (fiscal 2022) compared to fiscal year ended July 31, 2021 (fiscal 2021) - Net Sales above.

Retail’s Net sales increased for fiscal 2022 as compared to fiscal 2021 primarily due to a 0.9% increase in identical store sales from higher average basket sizes, including an increase from higher product costs.

Wholesale’s Net sales increased in fiscal 2023 as compared to fiscal 2022 primarily due to growth in the Supernatural, Independent retailers, and Chains channels, as discussed in Results of Operations - Fiscal year ended July 29, 2023 (fiscal 2023) compared to fiscal year ended July 30, 2022 (fiscal 2022) - Net Sales section above.

Retail’s Net sales increased for fiscal 2023 as compared to fiscal 2022 primarily due to inflation and new store sales, partially offset by lower volume.

Identical store sales decreased 0.9%.

Adjusted EBITDA

Wholesale’s Adjusted EBITDA increased 3% in fiscal 2022 as compared to 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 fiscal 2022 was $386 million and gross profit rate increased approximately 51 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 $366 million, which excludes depreciation and amortization, share-based compensation, LIFO charge and other adjustments as outlined in Note 16—Business Segments.

Wholesale’s operating expense rate increased 62 basis points primarily driven by continued investments in servicing our customers, which led to approximately 50 basis points of higher transportation expenses and distribution labor costs in fiscal 2022, higher occupancy costs, 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 distribution center start-up and consolidation costs incurred in the Pacific Northwest last year.

Wholesale’s Adjusted EBITDA decreased 22% in fiscal 2023 as compared to fiscal 2022.

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

Wholesale’s Gross profit excluding the LIFO charge for fiscal 2023 decreased $81 million and gross profit rate decreased 87 basis points driven by lower levels of procurement gains resulting from decelerating inflation, higher shrink expense and customer mix.

Wholesale’s Operating expense increased $75 million, which excludes depreciation and amortization, share-based compensation and other adjustments as outlined in Note 16—Business Segments in Part II, Item 8 of this Annual Report.

Wholesale’s operating expense rate decreased 22 basis points primarily driven by lower incentive compensation expense resulting from underperformance compared to targets and favorable transportation and distribution center labor costs due to a decrease in volume, partially offset by higher occupancy costs.

Wholesale’s depreciation expense increased $9 million compared to fiscal 2022.

Retail’s Adjusted EBITDA was unchanged in fiscal 2022 as compared to fiscal 2021.

Retail’s Gross profit dollar growth excluding the LIFO charge in fiscal 2022 was $12 million and its gross profit rate increased 20 basis points from lower promotional activity.

This increase was primarily offset by higher employee and occupancy costs.

Retail’s Adjusted EBITDA excludes depreciation and amortization, share-based compensation, LIFO charge and other adjustments as outlined in Note 16—Business Segments in Part II, Item 8 of this Annual Report.

Retail’s depreciation and amortization expense was unchanged compared to fiscal 2021.

Other Adjusted EBITDA improved 540% in fiscal 2022 primarily due to lower corporate overhead costs, including pandemic related costs and administrative costs.

Retail’s Adjusted EBITDA decreased 29% in fiscal 2023 as compared to fiscal 2022.

Retail’s Gross profit dollar decline excluding the LIFO charge in fiscal 2023 was $15 million and its gross profit rate decreased 74 basis points from higher shrink expense and increased promotional activity.

Retail’s Operating expense increased $13 million, which excludes depreciation and amortization, share-based compensation and other adjustments as outlined in Note 16—Business Segments in Part II, Item 8 of this Annual Report.

Retail’s operating expense rate increased 41 basis points primarily driven by higher employee-related costs and new store start-up costs.

Retail’s depreciation and amortization expense increased $7 million compared to fiscal 2022.

LIQUIDITY AND CAPITAL RESOURCES

• Total liquidity as of July 29, 2023 was $1,517 million and consisted of the following:

◦ Unused credit under our $2,600 million secured asset-based revolving credit facility (the “ABL Credit Facility”, described below) was $1,627 million as of July 30, 2022, which increased $347 million from $1,280 million as of July 31, 2021, primarily due to entering into a new, larger ABL Facility in the fourth quarter of fiscal 2022 as described below, partially offset by cash utilized to fund a voluntary prepayment on the Term Loan Facility (described below).

◦ Cash and cash equivalents was $44 million as of July 30, 2022, which increased $3 million from $41 million as of July 31, 2021.

• Our total debt decreased $65 million to $2,123 million as of July 30, 2022 from $2,188 million as of July 31, 2021, primarily driven by debt repayments from net cash flow contributions from operating activities and net proceeds from asset sales, partially offset by payments for capital expenditures during fiscal 2022.

• 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.

Also in the second quarter of fiscal 2022, prior to transitioning to Secured Overnight Financing Rates (“SOFR”), we amended our Term Loan Agreement to reduce the applicable margin for London Interbank Offered Rate (“LIBOR”) and base rate loans under the Term Loan Facility by 25 basis points.

• In the third quarter of fiscal 2022, we acquired the real property of our Riverside, California distribution center for approximately $153 million, 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 after-tax net proceeds from the transactions.

• In the fourth quarter of fiscal 2022, we entered into a new loan agreement (the “ABL Loan Agreement”), which provides for a $2,600 million ABL Credit Facility with an extended maturity to fiscal 2027, and we used borrowings thereunder to repay all amounts outstanding under and terminate the then outstanding ABL credit facility.

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

The ABL Loan Agreement utilizes Term SOFR and Prime rates as the benchmark interest rates.

Borrowings under the 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 9—Long-Term Debt in Part II, Item 8 of this Annual Report.

Also in the fourth quarter of fiscal 2022, we amended the Term Loan Agreement to change the Term Loan Facility reference rate from LIBOR to Term SOFR.

◦ Unused credit under our $2,600 million asset-based revolving credit facility (the “ABL Credit Facility”) was $1,480 million as of July 29, 2023, which decreased $147 million from $1,627 million as of July 30, 2022, primarily due to reduced total availability under the ABL Credit Facility driven by lower levels of assets comprising the facility’s borrowing base.

◦ Cash and cash equivalents was $37 million as of July 29, 2023, which decreased $7 million from $44 million as of July 30, 2022.

• Our total debt decreased $160 million to $1,963 million as of July 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, repurchases of common stock and employee restricted stock tax withholdings during fiscal 2023.

• Working capital decreased $322 million to $1,058 million as of July 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 and lower inventory levels, partially offset by lower liabilities related to accrued compensation and benefits.

• 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 on a revolving basis up to $300 million.

This purchase agreement was subsequently amended in the fourth quarter of fiscal 2023 to allow the sale of certain receivables up to $350 million.

In fiscal 2023, we received net cash proceeds of $287 million from selling receivables under this agreement, which were used to make a $125 million voluntary prepayment on the Term Loan Facility and reduce outstanding borrowings under the ABL Credit Facility.

• In fiscal 2024, scheduled debt maturities are expected to be $8 million.

Based on our Consolidated First Lien Net Leverage Ratio (as defined in the Term Loan Agreement) at the end of fiscal 2023, no prepayment from Excess Cash Flow in fiscal 2023 is required to be made in fiscal 2024.

• Working capital increased $317 million to $1,380 million as of July 30, 2022 from $1,063 million as of July 31, 2021, primarily due to the increase in inventory and accounts receivable levels related to new customers and sales growth of existing customers combined with the decrease in the current portion of finance lease liabilities and accrued expenses related to the contractual requirement to acquire the Riverside, California distribution center discussed above, which were partially offset by an increase in accounts payable related to inventories.

Sources and Uses of Cash

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Our continued access to short-term and long-term financing through credit markets depends on numerous factors, including the condition of the credit markets and our results of operations, cash flows, financial position and credit ratings.

Primary uses of cash include debt service, capital expenditures, working capital maintenance and income tax payments.

Primary uses of cash include debt service, capital expenditures, working capital maintenance, investments in cloud technologies and income tax payments.

We typically finance working capital needs with cash provided from operating activities and short-term borrowings.

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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.

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Long-Term Debt

During fiscal 2022, we made voluntary prepayments of $202 million on the Term Loan Facility and borrowed a net $139 million under the ABL Credit Facility.

We entered into a second amendment to the Term Loan Agreement to, among other things, reduce the applicable reference rate margin by 0.25%, and a third amendment to the Term Loan Agreement to amend the reference rate thereunder from LIBOR to Term SOFR.

During fiscal 2023, we made voluntary prepayments of $130 million on the Term Loan Facility with a portion of the proceeds received from monetizing certain receivables previously presented within accounts receivable, and from asset sales, and made net payments of $28 million on the ABL Credit Facility.

Refer to Note 9—Long-Term Debt in Part II, Item 8 of this Annual Report for 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 Senior Notes do not include any financial maintenance covenants.

Our ABL Loan Agreement subjects us to a fixed charge coverage ratio of at least 1.0 to 1.0 calculated at the end of each of our fiscal quarters on a rolling four quarter basis, if the adjusted aggregate availability is ever less than the greater of (i) $210 million and (ii) 10% of the aggregate borrowing base.

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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.

The following chart outlines our scheduled debt maturities by fiscal year, which excludes debt prepayments that may be required from Excess Cash Flow (as defined in the Term Loan Agreement) generated or sales of mortgaged properties in fiscal 2023 or beyond.

Refer to Note 9—Long-Term Debt in Part II, Item 8 of this Annual Report for further detail of our scheduled debt maturities by fiscal year and by debt instrument, which excludes debt prepayments that may be required from Excess Cash Flow (as defined in the Term Loan Agreement) generated or sales of mortgaged properties in fiscal 2024 or beyond.

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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 discussed above, in the fourth quarter of fiscal 2022, we (i) entered into the 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 did not 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 Consolidated Financial Statements.

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

As such, we adopted ASU 2020-04, as discussed in Note 2—Recently Adopted and Issued Accounting Pronouncements in Part II, Item 8 of this Annual Report, 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.

As of July 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 1.795% to 2.875%, with maturities between August 2022 and October 2025.

The fair value of these interest rate derivatives represents a total net asset of $2 million and are subject to volatility based on changes in market interest rates.

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

The fair values of these interest rate derivatives represent a total net asset of $22 million and are subject to volatility based on changes in market interest rates.

In fiscal 2021, 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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Payments for Capital Expenditures

Our capital expenditures decreased $59 million in fiscal 2022 to $251 million compared to $310 million for fiscal 2021.

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

Our capital expenditures increased $72 million in fiscal 2023 to $323 million compared to $251 million for fiscal 2022, primarily due to automation investments in our supply chain.

Our capital spending for fiscal 2023 and 2022 principally included information technology and supply chain expenditures including maintenance expenditures and investments in growth initiatives.

Fiscal 2023 included $290 million of distribution center improvements, technology and other expenditures, and $33 million of Retail expenditures.

Fiscal 2022 included $182 million of distribution center improvements, technology and other expenditures, $42 million of investments in new distribution centers, primarily the new Allentown, Pennsylvania distribution center, and $27 million of Retail expenditures.

Fiscal 2024 capital spending is expected to be approximately $400 million and include projects that automate, optimize and expand our distribution network, and finance our technology platform investments.

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Future investments may be financed through long-term debt or borrowings under our ABL Credit Facility and cash from operations.

The following chart outlines our capital expenditures by type over the last three fiscal years.

Cash Flow Information

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

Net increase (decrease) in cash and cash equivalents 3 (6) 2 9 (8)

Net (decrease) increase in cash and cash equivalents (7) 3 (6) (10) 9

Cash and cash equivalents, at beginning of period 44 41 47 3 (6)

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Fiscal 2023 compared to Fiscal 2022

The decrease in Net cash provided by operating activities of continuing operations was primarily due to higher levels of cash invested in net working capital due to higher costs of inventory on hand in excess of Accounts payable increases, and credit extended on continued sales growth, partially offset by higher amounts of cash provided from higher earnings in fiscal 2022.

Our Accounts payable related to merchandise inventory provide cash flow leverage against the majority, but not all, of our inventory on hand.

The decrease in Net cash used in investing activities of continuing operations was primarily due to proceeds received from the sale of the Riverside, California distribution center in fiscal 2022 discussed above and a reduction in payments for capital expenditures.

The decrease in Net cash used in financing activities of continuing operations was primarily due to less cash available from operating activities, net of cash used in investing activities, to reduce our outstanding debt.

The increase in Net cash provided by operating activities of continuing operations was primarily due to lower levels of cash utilized in net working capital, including the monetization of certain receivables discussed above, partially offset by lower cash generated from net income in fiscal 2023.

The increase in Net cash used in investing activities of continuing operations was primarily due to lower proceeds from asset sales, primarily due to cash received from the sale of the Riverside, California distribution center in fiscal 2022 discussed above, and an increase in payments for capital expenditures in fiscal 2023.

The increase in Net cash used in financing activities was primarily due to a net decrease in proceeds from borrowings under the revolving credit line and an increase in cash used to repurchase common stock, partially offset by lower levels of repayments of long-term debt and finance leases.

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 withdrawals.

Refer to Note 9—Long-Term Debt, Note 11—Leases, Note 13—Benefit Plans, Note 1—Significant Accounting Policies and Note 17—Commitments, Contingencies and Off-Balance Sheet Arrangements to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report for more information on the nature and timing of obligations for debt, leases, benefit plans, self-insurance and purchase obligations, respectively.

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In fiscal 2024, no minimum pension contributions are required to be made under the SUPERVALU INC.

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

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

An insignificant amount of contributions are expected to be made to defined benefit pension plans and postretirement benefit plans in fiscal 2024.

We fund our defined benefit pension plans based on the minimum contribution required under ERISA, the Pension Protection Act of 2006 and other applicable laws and additional contributions made at our discretion.

We fund our defined benefit pension plan based on the minimum contribution required under ERISA, the Pension Protection Act of 2006 and other applicable laws and additional contributions made at our discretion.

We may accelerate contributions or undertake contributions in excess of the minimum requirements from time to time subject to the availability of cash in excess of operating and financing needs or other factors as may be applicable.

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Plan trustees typically are responsible for determining the level of benefits to be provided to participants as well as the investment of the assets and plan administration.

Trustees are appointed in equal number by employers and unions that are parties to the relevant collective bargaining agreement.

Trustees are appointed in equal number by employers and unions that are parties to the relevant collective bargaining agreements.

Based on the assessment of the most recent information available from the multiemployer plans, we believe that most of the plans to which we contribute are underfunded.

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We made contributions to these plans, and recognized expense of $48 million, $45 million and $48 million in fiscal 2023, 2022 and 2021, respectively.

In fiscal 2023, we expect to contribute approximately $51 million to multiemployer plans related to continuing operations, subject to the outcome of collective bargaining and capital market conditions.

In fiscal 2024, we expect to contribute approximately $50 million to multiemployer plans, subject to the outcome of collective bargaining and capital market conditions.

We expect required cash payments to fund multiemployer pension plans from which we have withdrawn to be insignificant in any one fiscal year, which would exclude any payments that may be agreed to on a lump sum basis to satisfy existing withdrawal liabilities.

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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, which provided for the purchase of up to $200 million of our outstanding Common stock (the "2017 Repurchase Program").

We did not repurchase any shares of our Common stock in fiscal 2022, 2021 or 2020 pursuant to the 2017 Repurchase Program.

Under the 2022 Repurchase Program, we repurchased approximately 1,888,000 shares of our common stock for a total cost of $62 million in fiscal 2023.

We did not repurchase any shares of our common stock in fiscal 2022 or 2021.

As of July 29, 2023, we had $138 million remaining authorized under the 2022 Repurchase Program.

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

We may implement all or part of the repurchase program pursuant to a plan or plans meeting the conditions of Rule 10b5-1 under the Exchange Act.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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 ESTIMATES

The preparation of our Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities.

Management believes the following critical accounting policies reflect our more subjective or complex judgments and estimates used in the preparation of our Consolidated Financial Statements.

Management believes the following critical accounting estimates reflect our more subjective or complex judgments and estimates used in the preparation of our Consolidated Financial Statements.

Inventories are valued at the lower of cost or market.

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We evaluate inventory shortages (shrink) throughout each fiscal year based on actual physical counts in our facilities.

The majority of our inventory is valued under the LIFO method, which allows for matching of costs and revenues, as the current acquisition cost to is used to value cost of goods sold as inventory is sold in an inflationary environment.

The majority of our inventory is valued under the LIFO method, which allows for matching of costs and revenues, as the current acquisition cost is used to value cost of goods sold as inventory is sold in an inflationary environment.

If the first-in, first-out (“FIFO”) method had been used, Inventories, net, would have been higher by approximately $344 million and $225 million at July 29, 2023 and July 30, 2022, respectively.

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Pension benefits associated with these plans are generally based on each participant’s years of service, compensation, and age at retirement or termination.

Our defined benefit pension plans and certain supplemental executive retirement plans are closed to new participants and service crediting.

Our defined benefit pension plan and certain supplemental executive retirement plans are closed to new participants and service crediting.

While we believe the valuation methods used to determine the fair value of plan assets are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

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Our expected long-term rate of return on plan assets assumption is determined based on the portfolio’s actual and target composition, current market conditions, forward-looking return and risk assumptions by asset class, and historical long-term investment performance.

The assumed long-term rate of return on pension assets ranged from 4.25% to 4.50% for fiscal 2022.

The assumed long-term rate of return on pension assets was 6.00% for fiscal 2023.

The 10-year rolling average annualized return for the SUPERVALU INC.

Retirement Plan is approximately 7.9% based on returns from 2014 to 2023.

In accordance with GAAP, actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, affect expense and obligations in future periods.

Each 25-basis point reduction in expected return on plan assets would decrease Net periodic benefit income for fiscal 2023 by approximately $4 million.

Amortizing gains and losses

In accordance with GAAP, actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, affect expense and obligations in future periods.

We recognize the amortization of net actuarial loss on the SUPERVALU INC.

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In the future, we may consider opportunities to limit the Company’s exposure to underfunded multiemployer pension obligations by moving our active associates in such plans to defined contribution plans, and withdrawing from the pension plan or continuing to participate in the plans for prior obligations.

In fiscal 2021, we incurred a $63 million charge for obligations related to withdrawal liabilities for three Retail multiemployer pension plans where our active associates moved to defined contribution plans for future benefits.

As we continue to work to find solutions to underfunded multiemployer pension plans, it is possible we could incur withdrawal liabilities for certain additional multiemployer pension plan obligations in the future as we actively negotiate new collective bargaining agreements with a number of our unions in due course.

The American Rescue Plan Act (“ARPA”) established the Special Financial Assistance (“SFA”) Program for financially troubled multi-employer pension plans.

Under ARPA, eligible multiemployer pension plans can apply to receive a cash payment in an amount projected by the Pension Benefit Guaranty Corporation to remain solvent and pay pension benefits through the plan year ending 2051.

As of the end of fiscal 2023, one plan to which the Company contributes has received SFA, and two other plans to which the Company contributes are currently on the waiting list to apply for SFA funding.

We continue to evaluate our exposure to underfunded multiemployer pension plans.

Although these liabilities are not a direct obligation or liability of ours, addressing these uncertainties requires judgment in the timing of expense recognition when we determine our commitment is probable and estimable.

Refer to Note 13—Benefit Plans in Part II, Item 8 of this Annual Report for more information relating to our participation in these multiemployer pension plans and to the actuarial assumptions used in determining pension and other postretirement liabilities and expenses.

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These estimates project cash flows several years into the future and include assumptions on variables such as changes in supply contracts, macroeconomic impacts and market competition.

We did not identify any material impairments in fiscal 2022 as part of our quarterly procedures or annual impairment assessment.

As part of our annual impairment assessment, we recognized a $25 million intangible asset impairment charge associated with the rationalization of our brands portfolio in an effort to focus on our core private brand offerings.

The Company accounts for income taxes under the asset and liability method.

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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-K

Item 7. Management’s Discussion and Analysis