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Item 2. Management’s Discussion and Analysis

2023-12-06 compared with 2023-06-07 · 133 added, 190 removed, 222 unchanged (59% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly 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 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;

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

• labor and other workforce shortages and challenges;

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

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

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

• our ability to 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;

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• 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 “Part I.

Item 1A Risk Factors” of our Annual Report on Form 10-K for the year ended July 30, 2022 (the “Annual Report”), as well as any other cautionary language in this Quarterly 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.

You should carefully review the risks described under “Risk Factors” included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended July 29, 2023 (the “Annual Report”), as well as any other cautionary language in this Quarterly 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.

EXECUTIVE OVERVIEW

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and notes thereto contained in this Quarterly Report on Form 10-Q, the information contained under the caption “Forward-Looking Statements,” and the information in the Annual Report.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and notes thereto contained in this Quarterly Report on Form 10-Q, the information contained under the caption “Cautionary Note Regarding Forward-Looking Statements,” and the information in the Annual Report.

Business Overview

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We believe we are uniquely positioned to provide the broadest array of products and services to customers throughout North America.

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

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

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

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

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

network automation and optimization;

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digital offering enhancement and infrastructure unification and modernization.

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

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

We 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.

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

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

We are also implementing 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 stock-keeping unit (“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.

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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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 commodity and labor input costs continue to impact the prices of products we procure from manufacturers.

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

Consumer spending may continue to 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 continues to affect our business, and fluctuating commodity and labor input costs may 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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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 continues to ramp up to its operating capacity.

Retail Operations

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Impact of Product Cost Inflation

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 .

We experienced a mix of inflation across product categories during the first quarter of fiscal 2024.

In the aggregate across our businesses, including the mix of products, management estimates our businesses experienced product cost inflation of approximately three percent in the first quarter of fiscal 2024 as compared to the first quarter of 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 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.

In the first quarter of fiscal 2024, we experienced fewer and less significant vendor product cost increases as compared to the first quarter of fiscal 2023.

These decreases negatively impacted our gross profit rate when comparing the first quarter of fiscal 2024 to the first quarter of fiscal 2023.

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

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.

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.

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 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.

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

The changes to the definition of Adjusted EBITDA from prior periods reflect changes to line item references in our 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.

13-Week Period Ended 39-Week Period Ended

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

13-Week Period Ended

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

Net sales $ 7,552 $ 7,532 $ 20

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Operating expenses 1,023 1,000 23

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

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

Operating income 33 123 (90) 195 355 (160)

Restructuring, acquisition and integration related expenses 4 2 2

Loss (gain) on sale of assets and other asset charges 19 (5) 24

Operating (loss) income (16) 99 (115)

Net periodic benefit income, excluding service cost (3) (7) 4

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Other income, net — (1) 1

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

(Loss) income before income taxes (48) 72 (120)

(Benefit) provision for income taxes (9) 5 (14)

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

Net (loss) income including noncontrolling interests (39) 67 (106)

Less net income attributable to noncontrolling interests — (1) 1

Net income attributable to United Natural Foods, Inc.

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

$ (39) $ 66 $ (105)

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$ 117 $ 207 $ (90)

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

13-Week Period Ended 39-Week Period Ended

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

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

Adjustments to net income including noncontrolling interests:

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

13-Week Period Ended

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

Net (loss) income including noncontrolling interests $ (39) $ 67

Adjustments to net (loss) income including noncontrolling interests:

Less net income attributable to noncontrolling interests — (1)

Net periodic benefit income, excluding service cost

(8) (10) (22) (30)

Interest expense, net 35 35

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LIFO charge 7 21

Restructuring, acquisition and integration related (benefits) expenses

Loss (gain) on sale of assets (1)

4 (88) — (87)

Multiemployer pension plan withdrawal benefit (2)

Other retail benefit (3)

Restructuring, acquisition and integration related expenses

Loss (gain) on sale of assets and other asset charges (1)

Business transformation costs (2)

Other adjustments (3)

Adjusted EBITDA $ 117 $ 207

(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 costs primarily for business transformation initiatives, including network automation and optimization, commercial value creation, digital offering enhancement and infrastructure unification and modernization.

(1) The first quarter of fiscal 2024 includes a $21 million non-cash asset impairment charge related to one of our corporate-owned office locations.

(2) Reflects costs associated with business transformation initiatives, primarily including third-party consulting costs and licensing costs, which are included within Operating expenses in the Condensed Consolidated Statements of Operations.

(3) Primarily reflects third-party professional service fees related to shareholder negotiations.

RESULTS OF OPERATIONS

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13-Week Period Ended

Increase (Decrease) 39-Week Period Ended

Increase (Decrease)

Customer Channel (1)

2023 April 30,

2022 $ % April 29,

2023 April 30,

2023 October 29,

Chains $ 3,184 $ 3,224 $ (40) (1.2) %

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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.

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.

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

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

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

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

Retail Net sales 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.

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

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

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

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

Independent retailers Net sales increased primarily due to increased sales under a supply agreement with a new customer within the Atlantic region commencing in the first quarter of fiscal 2022 and growth in sales to existing customers, including an increase from higher product costs, which drove higher wholesale selling prices to our customers, partially offset by a decrease in units sold.

Retail Net sales increased primarily due to 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.

Our Net sales for the first quarter of fiscal 2024 increased approximately 0.3% from the first quarter of fiscal 2023.

The increase in Net sales was primarily driven by inflation and new business with existing customers, primarily resulting from growth in our Supernatural channel.

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

Retail Net sales decreased primarily due to a 3.2% decrease in identical store sales from lower volume.

Cost of Sales and Gross Profit

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.

Our gross profit as a percentage of Net sales decreased to 13.8% for fiscal 2023 year-to-date compared to 14.4% for fiscal 2022 year-to-date.

The LIFO charge was $83 million and $102 million for fiscal 2023 and fiscal 2022 year-to-date, respectively.

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 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.

Our gross profit decreased $66 million, or 6.0%, to $1,030 million for the first quarter of fiscal 2024, from $1,096 million for the first quarter of fiscal 2023.

Our gross profit as a percentage of Net sales decreased to 13.6% for the first quarter of fiscal 2024 compared to 14.6% for the first quarter of fiscal 2023.

The LIFO charge was $7 million and $21 million in the first quarter of fiscal 2024 and 2023, respectively.

E xcluding the non-cash LIFO charge, gross profit rate was 13.7% of Net sales and 14.8% of Net sales for the first quarter of fiscal 2024 and 2023 , respectively.

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

Operating Expenses

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.

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 $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 and a decrease in gain on sale of assets as described above.

Operating expenses increased $23 million, or 2.3%, to $1,023 million, or 13.5% of Net sales, for the first quarter of fiscal 2024 compared to $1,000 million, or 13.3% of Net sales, for the first quarter of fiscal 2023.

The increase in Operating expenses as a percentage of Net sales was primarily driven by investments in our transformation initiatives, partially offset by lower transportation and distribution center labor costs due to increased operational efficiencies across our supply chain and a decrease in volume.

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

Loss on sale of assets and other asset charges was $19 million in the first quarter of fiscal 2024, compared to a gain on sale of assets of $5 million for the first quarter of fiscal 2023.

The first quarter of fiscal 2024 primarily includes a $21 million asset impairment charge related to one of our corporate-owned office locations.

There were no asset impairment charges in the first quarter of fiscal 2023.

Operating (Loss) Income

Reflecting the factors described above, Operating loss increased $115 million to $16 million for the first quarter of fiscal 2024, compared to operating income of $99 million for the first quarter of fiscal 2023.

The increase in operating loss was primarily driven by a decrease in Gross profit, a loss on sale of assets and other asset charges in the first quarter of fiscal 2024 compared to a gain in the first quarter of fiscal 2023, and an increase in Operating expenses, each as described above.

Interest Expense, Net

13-Week Period Ended 39-Week Period Ended

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

13-Week Period Ended

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

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

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Amortization of financing costs and discounts 2 2

Loss on debt extinguishment — 1 3 7

Interest income (1) —

Interest expense, net $ 35 $ 35

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.

Interest expense, net, in the first quarter of fiscal 2024 was unchanged from the first quarter of fiscal 2023 as higher average interest rates were offset by lower outstanding debt balances and higher interest income.

(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 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 $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.

was $92 million, or $1.51 per diluted common share, for fiscal 2023 year-to-date, compared to $209 million, or $3.44 per diluted common share, for fiscal 2022 year-to-date.

The effective tax rate for the first quarter of fiscal 2024 was a benefit rate of 18.8% on pre-tax loss compared to an expense rate of 6.9% on pre-tax income for the first quarter of fiscal 2023.

The change from the first quarter of fiscal 2023 is primarily driven by the reduction of discrete tax benefits related to employee stock award vestings in the first quarter of fiscal 2024.

In addition, the first quarter of fiscal 2023 included a tax benefit from the release of reserves for unrecognized tax positions that did not recur in the first quarter of fiscal 2024.

Net (Loss) Income Attributable to United Natural Foods, Inc.

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

was $39 million, or $0.67 per diluted common share, for the first quarter of fiscal 2024, compared to Net income attributable to United Natural Foods, Inc.

of $66 million, or $1.07 per diluted common share, for the first quarter of fiscal 2023.

Segment Results of Operations

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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) April 29, 2023 April 30, 2022 Change April 29, 2023 April 30, 2022 Change

13-Week Period Ended

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

Wholesale $ 7,281 $ 7,259 $ 22

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Total Adjusted EBITDA $ 117 $ 207 $ (90)

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.

Wholesale’s Net sales increased in the first quarter of fiscal 2024 as compared to the first quarter of fiscal 2023 primarily due to inflation and growth in the Supernatural channel, partially offset by a decrease in units sold and declines in the Independent retailers and Chains channels, as discussed in Results of Operations - Net Sales section above.

Retail’s Net sales decreased in the first quarter of fiscal 2024 as compared to the first quarter of fiscal 2023 primarily due to a 3.2% decrease in identical store sales from lower volume.

The decrease in eliminations Net sales in the first quarter of fiscal 2024 as compared to the first quarter of fiscal 2023 was primarily due to a decrease in Wholesale to Retail sales, which are eliminated upon consolidation.

Adjusted EBITDA

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 Adjusted EBITDA decreased 31.6% for the first quarter of fiscal 2024 as compared to the first quarter of fiscal 2023.

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

Wholesale’s Gross profit excluding the LIFO charge for the first quarter of fiscal 2024 decreased $62 million and gross profit rate decreased approximately 89 basis points driven by lower levels of procurement gains resulting from decelerating inflation.

Wholesale’s Operating expense decreased $8 million, which excludes depreciation and amortization, share-based compensation and other adjustments as outlined in Note 14—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 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 $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 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 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.

Wholesale’s operating expense rate decreased 14 basis points primarily driven by lower transportation and distribution center labor costs due to a decrease in volume and increased operational efficiencies across our supply chain.

Wholesale’s depreciation and amortization expense increased $3 million in the first quarter of fiscal 2024 as compared to the first quarter of fiscal 2023.

Retail’s Adjusted EBITDA decreased 105.0% for the first quarter of fiscal 2024 as compared to the first quarter of fiscal 2023.

The decrease was driven by a decline in gross profit, and higher operating expenses primarily due to increased costs associated with new stores.

Retail’s Adjusted EBITDA excludes depreciation and amortization, share-based compensation, LIFO charge and other adjustments as outlined in Note 14—Business Segments.

Retail’s depreciation and amortization expense was flat to the first quarter of fiscal 2023.

Other Adjusted EBITDA decreased $16 million in the first quarter of fiscal 2024 as compared to the first quarter of fiscal 2023 primarily due to an increase in operating expenses.

LIQUIDITY AND CAPITAL RESOURCES

• 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 $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.

• Total liquidity as of October 28, 2023 was $1,285 million and consisted of the following:

◦ Unused credit under our $2,600 million asset-based revolving credit facility (the “ABL Credit Facility”) was $1,248 million as of October 28, 2023, which decreased $232 million from $1,480 million as of July 29, 2023, primarily due to increased cash utilized to fund seasonal working capital increases.

◦ Cash and cash equivalents was $37 million as of October 28, 2023, which was unchanged from July 29, 2023.

• Our total debt increased $338 million to $2,301 million as of October 28, 2023 from $1,963 million as of July 29, 2023, primarily related to additional borrowings under the ABL Credit Facility to fund seasonal working capital increases.

• Working capital increased $322 million to $1,380 million as of October 28, 2023 from $1,058 million as of July 29, 2023, primarily due to seasonal increases in inventory and accounts receivable levels, 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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Long-Term Debt

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.

During the first quarter of fiscal 2024, we borrowed a net $340 million under the ABL Credit Facility.

Refer to Note 8—Long-Term Debt in Part I, Item 1 of this Quarterly Report on Form 10-Q for a detailed discussion of the provisions of our credit facilities and certain long-term debt agreements and additional information.

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

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

As of 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.

As of October 28, 2023, we had an aggregate of $750 million of floating rate notional debt subject to active interest rate swap contracts, which effectively fix the SOFR component of our floating interest payments through pay fixed and receive floating interest rate swap agreements.

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

The fair values of these interest rate derivatives represent a total net asset of $19 million as of October 28, 2023, and are subject to volatility based on changes in market interest rates.

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

As of April 29, 2023, we had fixed price fuel contracts and foreign currency forward agreements outstanding.

As of October 28, 2023, we had fixed price fuel contracts and foreign currency forward agreements outstanding.

Gains and losses and the outstanding assets and liabilities from these arrangements are insignificant.

Payments for Capital Expenditures

Our capital expenditures for fiscal 2023 year-to-date were $218 million compared to $158 million for fiscal 2022 year-to-date, an increase of $60 million, primarily due to investments in automation.

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

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

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

Our capital expenditures increased $7 million in the first quarter of fiscal 2024 to $74 million compared to $67 million for the first quarter of fiscal 2023, primarily due to automation investments in our supply chain.

Our capital spending for the first quarter of fiscal 2024 and 2023 principally included information technology and supply chain expenditures, including maintenance expenditures and investments in growth initiatives.

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

We expect to finance fiscal 2024 capital expenditures requirements with cash generated from operations and borrowings under our ABL Credit Facility.

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13-Week Period Ended

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

Net cash provided by (used in) operating activities

$ 402 $ (31) $ 433

Net cash (used in) provided by investing activities

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

Net cash used in operating activities

$ (254) $ (262) $ 8

Net cash used in financing activities

Net cash used in investing activities

(72) (61) (11)

Net (decrease) increase in cash and cash equivalents (6) 7 (13)

Net cash provided by financing activities

Effect of exchange rate on cash — (1) 1

Net decrease in cash and cash equivalents — (5) 5

Cash and cash equivalents, at beginning of period 37 44 (7)

Cash and cash equivalents, at end of period $ 37 $ 39 $ (2)

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.

The decrease in Net cash used in operating activities in the first quarter of fiscal 2024 compared to the first quarter of fiscal 2023 was primarily due to lower levels of cash utilized in net working capital, partially offset by lower cash generated from net income in the first quarter of fiscal 2024.

The increase in net cash used in investing activities in the first quarter of fiscal 2024 compared to the first quarter of fiscal 2023 was primarily due to an increase in payments for capital expenditures in the first quarter of fiscal 2024.

The increase in net cash provided by financing activities in the first quarter of fiscal 2024 compared to the first quarter of fiscal 2023 was primarily due to a decrease in cash utilized for employee restricted stock tax withholdings and repurchasing common stock, partially offset by a net decrease in proceeds from borrowings under the revolving credit line.

Other Obligations and Commitments

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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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Share Repurchases

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 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.

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

We did not repurchase any shares of our common stock in the first quarter of fiscal 2024.

As of October 28, 2023, we had $138 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.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis