Item 7. Management’s Discussion and Analysis
ITEM 7. 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, “Cautionary Note Regarding Forward-Looking Statements” and other risks described elsewhere in this Annual Report. The following includes a comparison of our consolidated results of operations, our segment results and financial position for fiscal years 2024 and 2023. For a comparison of our consolidated results of operations, segment results and financial position for fiscal years 2023 and 2022, see Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, in our Annual Report on Form 10-K for the fiscal year ended July 29, 2023, filed with the Securities and Exchange Commission on September 26, 2023.
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. In some cases you can identify these statements by forward-looking words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek,” “should,” “will” and “would,” or similar words. Statements that contain these words and other statements that are forward-looking in nature should be read carefully because they discuss future expectations, contain projections of future results of operations or of financial positions or state other “forward-looking” information.
Forward-looking statements involve inherent uncertainty and may ultimately prove to be incorrect. These statements are based on our management’s beliefs and assumptions, which are based on currently available information. These assumptions could prove inaccurate. You are cautioned not to place undue reliance on forward-looking statements. Except as otherwise may be required by law, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or actual operating results. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to:
• our dependence on principal customers;
• 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 strategic 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;
• the addition or loss of significant customers or material changes to our relationships with these customers;
• our ability to realize anticipated benefits of strategic transactions;
• our ability to continue to grow sales, including of our higher margin natural and organic foods and non-food products;
• our ability to maintain sufficient volume in our wholesale distribution and services businesses to support our operating infrastructure;
• our ability to access additional capital;
• increases in healthcare, pension and other costs under our single employer benefit plan 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;
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• our ability to timely and successfully deploy our warehouse management system throughout our distribution centers and our transportation management system across the Company and to achieve efficiencies and cost savings from these efforts;
• the potential for disruptions in our supply chain or our distribution capabilities from circumstances beyond our control, including due to lack of long-term contracts, severe weather, labor shortages 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;
• our ability to maintain food quality and safety; and
• volatility in fuel costs.
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.
EXECUTIVE OVERVIEW
Business Overview
UNFI is a leading distributor of grocery and non-food products, and support services provider to retailers in the United States and Canada. 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 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; 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 31 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. We believe our total product assortment and service offerings are unmatched by our wholesale competitors. We plan to continue to pursue new business opportunities with independent retailers that operate diverse formats, regional and national chains, as well as international customers with wide-ranging needs. Our business is classified into two reportable segments: Wholesale and Retail; and also includes a manufacturing division and a branded product line division.
We are focused on becoming a more effective and efficient business partner to our customers, which we believe will position us for long-term profitable growth. We have undertaken a new strategy and have established new three-year financial objectives that begin in fiscal 2025 and are designed to make us more efficient while improving free cash flow generation and reducing net leverage. Our strategy includes the areas of focus detailed under “Business” included in Part 1, Item 1 of this Annual Report.
During fiscal 2024, we continued to implement near-term initiatives to help improve profitability and strengthen our foundation while we finalized and began implementing our revised strategy.
We expect to continue to use available capital to re-invest in our business and are committed to improving our free cash flow and financial leverage while reducing outstanding debt.
We believe we can optimize our performance and profitability through our improvement 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.
Our largest customer accounted for more than 10% of our Net sales in fiscal 2024. On May 21, 2024, we amended and restated our distribution agreement with this customer which, among other things, extended the term of that agreement through May 20, 2032.
Trends and Other Factors Affecting Our Business
Our results are impacted by macroeconomic and demographic trends, changes in the food distribution market structure and changes in consumer behavior. 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.
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The U.S. economy has experienced economic volatility in recent years, which has had, and we expect may continue to have, an impact on consumer confidence and behavior. 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. Our Wholesale customers manage their businesses independently and operate in a competitive environment.
Wholesale Distribution Network Optimization
We are making initial strides towards our network optimization goal by streamlining our distribution center network to create a more efficient supply chain and reduce capital intensity. Subsequent to the fourth quarter of fiscal 2024, we began the consolidation of the volume of two distribution centers in the upper Midwest and their related off-site storage facilities into other facilities in the Central region. We expect to achieve synergies and cost savings as a result of these efforts through eliminating inefficiencies, including incurring lower operating, shrink and off-site storage expenses.
In the second quarter of fiscal 2024, we began the development of our new Manchester, Pennsylvania distribution center, which has approximately 1.3 million square feet. We recognized a $205 million right-of-use asset and operating lease liability for this distribution center in fiscal 2024. Subsequent to the fourth quarter of fiscal 2024, in September 2024, we began operating this facility, and we expect to begin consolidating volume from other nearby distribution centers in the East region into this new distribution center in fiscal 2025.
We plan to continue to evaluate our distribution center network to further optimize performance and expect to incur incremental expenses related to any future network realignment, expansion or improvements, including network optimization and automation initiatives. We are working to both minimize these potential future costs and obtain new business to further improve the efficiency of our transforming distribution network.
Retail Operations
We currently operate 76 retail grocery stores, including 54 Cub Foods corporate stores and 22 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 the stores we operate and the stores of our franchisees. In addition, we operate 24 “Cub Wine and Spirit” and “Cub Liquor” stores.
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 Changes
We experienced a mix of inflation and deflation across product categories during fiscal 2024. In the aggregate across our businesses, including the mix of products, management estimates our businesses experienced product cost inflation of approximately one percent in fiscal 2024 as compared to fiscal 2023. Cost inflation and deflation estimates are based on individual like items sold during the periods being compared. Changes in merchandising, customer buying habits and competitive pressures create inherent difficulties in measuring the impact of inflation and deflation on Net sales and Gross profit. 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 generally has the effect of decreasing Gross profit and the carrying value of inventory during periods of inflation.
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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 fiscal 2024, we experienced fewer and less significant vendor product cost increases as compared to fiscal 2023. These decreases negatively impacted our gross profit rate when comparing fiscal 2024 to fiscal 2023.
Composition of Consolidated Statements of Operations and Business Performance Assessment
Net Sales
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.
Cost of Sales and Gross Profit
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.
Operating Expenses
Operating expenses include distribution expenses of warehousing, delivery, purchasing, receiving, selecting, and outbound transportation expenses, and selling and administrative expenses. These expenses include salaries and wages, employee benefits, occupancy, insurance, depreciation and amortization expense and share-based compensation expense.
Restructuring, Acquisition and Integration Related Expenses
Restructuring, acquisition and integration related expenses reflect expenses resulting from restructuring activities, including severance 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
Net periodic benefit income, excluding service cost reflects the recognition of expected returns on benefit plan assets and interest costs on plan liabilities.
Interest Expense, Net
Interest expense, net includes primarily interest expense on long-term debt, net of capitalized interest, loss on debt extinguishment, interest expense on finance lease obligations, amortization of financing costs and discounts, and interest income.
Adjusted EBITDA
Our Consolidated Financial Statements are prepared and presented in accordance with generally accepted accounting principles in the United States (“GAAP”). In addition to the GAAP results, we consider certain non-GAAP financial measures to assess the performance of our business and understand underlying operating performance and core business trends, which we use to facilitate operating performance comparisons of our business on a consistent basis over time. Adjusted EBITDA is provided as a supplement to our results of operations and related analysis, and should not be considered superior to, a substitute for or an alternative to, any financial measure of performance prepared and presented in accordance with GAAP. Adjusted EBITDA excludes certain items because they are non-cash items or items that do not reflect management’s assessment of ongoing business performance.
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We believe Adjusted EBITDA is useful because it provides additional information regarding factors and trends affecting our business, which are used in the business planning process to understand expected operating performance, to evaluate results against those expectations, and because of its importance as a measure of underlying operating performance, as the primary compensation performance measure under certain compensation programs and plans. We believe Adjusted EBITDA is reflective of factors that affect our underlying operating performance and facilitate operating performance comparisons of our business on a consistent basis over time. Investors are cautioned that there are material limitations associated with the use of non-GAAP financial measures as an analytical tool. Certain adjustments to our GAAP financial measures reflected below exclude items that may be considered recurring in nature and may be reflected in our financial results for the foreseeable future. These measurements and items may be different from non-GAAP financial measures used by other companies. Adjusted EBITDA should be reviewed in conjunction with our results reported in accordance with GAAP in this Annual Report.
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 (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.
Assessment of Our Business Results
The following table sets forth a summary of our results of operations and Adjusted EBITDA for the periods indicated.
(in millions) 2024
(53 weeks)
2023
(52 weeks)
Increase (Decrease)
Net sales $ 30,980 $ 30,272 $ 708
Cost of sales 26,779 26,141 638
Gross profit 4,201 4,131 70
Operating expenses 4,100 3,973 127
Restructuring, acquisition and integration related expenses 36 8 28
Loss on sale of assets and other asset charges 57 30 27
Operating income 8 120 (112)
Net periodic benefit income, excluding service cost (15) (29) 14
Interest expense, net 162 144 18
Other income, net (2) (2) —
(Loss) income before income taxes (137) 7 (144)
Benefit for income taxes (27) (23) (4)
Net (loss) income including noncontrolling interests (110) 30 (140)
Less net income attributable to noncontrolling interests (2) (6) 4
Net (loss) income attributable to United Natural Foods, Inc. $ (112) $ 24 $ (136)
Adjusted EBITDA $ 518 $ 640 $ (122)
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The following table reconciles Net (loss) income including noncontrolling interests to Adjusted EBITDA.
(in millions) 2024
(53 weeks)
2023
(52 weeks)
Net (loss) income including noncontrolling interests $ (110) $ 30
Adjustments to net (loss) income including noncontrolling interests:
Less net income attributable to noncontrolling interests (2) (6)
Net periodic benefit income, excluding service cost
(15) (29)
Interest expense, net 162 144
Other income, net (2) (2)
Benefit for income taxes
(27) (23)
Depreciation and amortization 319 304
Share-based compensation 37 38
LIFO charge 7 119
Restructuring, acquisition and integration related expenses (1)
36 8
Loss on sale of assets and other asset charges (2)
57 30
Multiemployer pension plan withdrawal charges (3)
— 1
Other retail expense (4)
— 1
Business transformation costs (5)
52 25
Other adjustments (6)
4 —
Adjusted EBITDA $ 518 $ 640
(1) Fiscal 2024 and fiscal 2023 primarily reflects costs associated with certain employee severance.
(2) Fiscal 2024 primarily includes a $21 million non-cash asset impairment charge related to one of our corporate-owned office locations in the first quarter of fiscal 2024, a $7 million non-cash asset impairment charge related to the decision to close certain retail store locations in the third quarter of fiscal 2024, a $15 million non-cash impairment charge related to the decision to close certain leased and owned distribution center locations in the fourth quarter of fiscal 2024 and $21 million in losses on the sales of receivables under the accounts receivable monetization program. Fiscal 2023 primarily 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 and $14 million in losses on the sales of receivables . Refer to Note 3—Revenue Recognition, Note 5—Property and Equipment, Net and Note 6—Goodwill and Intangible Assets, Net in Part II, Item 8 of this Annual Report for additional information.
(3) Fiscal 2023 reflects adjustments to multiemployer pension plan withdrawal charge estimates.
(4) Fiscal 2023 reflects store closure costs, operational wind-down and inventory charges.
(5) Reflects costs associated with business transformation initiatives, primarily including third-party consulting costs and licensing costs, and third-party professional service fees related to the board-led financial review in fiscal 2024, all of which are included within Operating expenses in the Consolidated Statements of Operations.
(6) Primarily reflects third-party professional service fees related to shareholder negotiations in the first quarter of fiscal 2024.
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Within the following results of operations, we have estimated the impact of the additional week in fiscal 2024, where applicable and estimable, to provide more comparable financial results on a year-over-year basis. The impact of the 53rd week discussed below represents an estimate of the contribution from the additional week in fiscal 2024 and is calculated by taking one-fifth of the respective metrics for the last five-week period within the 14-week fourth quarter of fiscal 2024. The 53rd week in fiscal 2024 had no impact on Restructuring, acquisition and integration related expenses or Loss on sale of assets and other asset charges.
RESULTS OF OPERATIONS
Fiscal year ended August 3, 2024 (fiscal 2024) compared to fiscal year ended July 29, 2023 (fiscal 2023)
Net Sales
The following table sets forth our Net sales by customer channel. Within the following table, we have estimated the impact of the additional 53rd week in fiscal 2024 to provide more comparable financial results on a year-over-year basis.
(in millions except percentages) 2024
(53 weeks)
2024
(53rd week estimated impact)
2024
(52 weeks) (2)
2023
(52 weeks)
Comparable 52-Week Increase (Decrease) (2)
Customer Channel (1)
$ %
Chains $ 12,967 $ 245 $ 12,722 $ 12,816 $ (94) (0.7) %
Independent retailers 7,605 141 7,464 7,699 (235) (3.1) %
Supernatural 6,941 133 6,808 6,374 434 6.8 %
Retail 2,436 45 2,391 2,480 (89) (3.6) %
Other 2,555 44 2,511 2,477 34 1.4 %
Eliminations (1,524) (26) (1,498) (1,574) 76 (4.8) %
Total net sales $ 30,980 $ 582 $ 30,398 $ 30,272 $ 126 0.4 %
(1) Refer to Note 3—Revenue Recognition in Part II, Item 8 of this Annual Report for our channel definitions and additional information.
(2) Excludes the estimated impact of the 53rd week in fiscal 2024.
Our Net sales for fiscal 2024 increased $708 million, or 2.3%, to $31.0 billion in fiscal 2024, from $30.3 billion in fiscal 2023. The 53rd week in fiscal 2024 contributed an estimated $582 million to Net sales. Excluding the impact of the 53rd week, Net sales were $30.4 billion, an increase of approximately 0.4% from fiscal 2023. The increase in Net sales was primarily driven by inflation and new business with existing customers. These increases were partially offset by a decline in unit volumes.
Retail Net sales decreased $44 million in fiscal 2024 as compared to fiscal 2023. The 53rd week in fiscal 2024 contributed an estimated $45 million to Retail Net sales. Excluding the impact of the 53rd week, Retail Net sales decreased $89 million, or 3.6%, primarily due to lower volume and store closures. Identical store sales decreased 3.7%.
Cost of Sales and Gross Profit
Our Gross profit increased $70 million, or 1.7%, to $4,201 million in fiscal 2024, from $4,131 million in fiscal 2023. Gross profit increased by $82 million from the estimated impact of the 53rd week in fiscal 2024. Our Gross profit as a percentage of Net sales was 13.6% in fiscal 2024, which was approximately flat compared to fiscal 2023. The LIFO charge was $7 million and $119 million in fiscal 2024 and fiscal 2023, respectively. Excluding the non-cash LIFO charge, gross profit rate was 13.6% of Net sales and 14.0% of Net sales for fiscal 2024 and fiscal 2023, respectively. The remaining decrease in gross profit rate of 46 basis points was primarily driven by lower levels of procurement gains resulting from decelerating inflation and a lower retail gross profit rate, which were partially offset by the benefit of lower shrink expense.
Operating Expenses
Operating expenses increased $127 million, or 3.2%, to $4,100 million, or 13.2% of Net sales, in fiscal 2024 compared to $3,973 million, or 13.1% of Net sales, in fiscal 2023. Operating expenses increased by $78 million from the estimated impact of the 53rd week in fiscal 2024. The increase in Operating expenses as a percentage of Net sales was primarily driven by approximately $49 million higher incentive compensation expense in fiscal 2024 and incremental transformation costs, which were partially offset by lower transportation costs and other operational supply chain efficiencies.
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Restructuring, Acquisition and Integration Related Expenses
Restructuring, acquisition and integration related expenses were $36 million for fiscal 2024, compared to $8 million for fiscal 2023. The increase was primarily driven by costs associated with certain employee severance and other employee separation costs in fiscal 2024.
Loss (Gain) on Sale of Assets and Other Asset Charges
Loss on sale of assets and other asset charges increased $27 million to $57 million for fiscal 2024, from $30 million for fiscal 2023. The increase in fiscal 2024 was primarily driven by higher asset impairment charges and losses on the sales of receivables under the accounts receivable monetization program, which was entered into early in the second quarter of fiscal 2023. Fiscal 2024 primarily includes $43 million in asset impairment charges related to one of our corporate-owned office locations, certain leased and owned distribution centers and certain retail store locations and $21 million in losses on the sales of receivables. Fiscal 2023 primarily included a $25 million intangible asset impairment charge related to a rationalization of our brands portfolio and $14 million in losses on the sales of receivables.
Operating Income
Reflecting the factors described above, Operating income decreased $112 million to $8 million for fiscal 2024, from $120 million in fiscal 2023. The decrease in Operating income was primarily driven by an increase in Operating expenses, an increase in Restructuring, acquisition and integration related expenses and an increase in Loss on sale of assets and other asset charges, partially offset by an increase in Gross profit.
Net Periodic Benefit Income, Excluding Service Cost
Net periodic benefit income, excluding service cost decreased $14 million to $15 million in fiscal 2024, from $29 million in fiscal 2023. 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 and $3 million of lower income from expected returns on plan assets.
Interest Expense, Net
(in millions) 2024
(53 weeks)
2023
(52 weeks)
Increase (Decrease)
Interest expense on long-term debt, net of capitalized interest $ 144 $ 130 $ 14
Interest expense on finance lease obligations 2 3 (1)
Amortization of financing costs and discounts 9 10 (1)
Loss on debt extinguishment 10 3 7
Interest income (3) (2) (1)
Interest expense, net $ 162 $ 144 $ 18
The increase in Interest expense, net for fiscal 2024 compared to fiscal 2023 was primarily driven by higher average interest rates, an increase in losses on debt extinguishment, and an estimated $3 million impact from the 53rd week in fiscal 2024.
(Benefit) Provision for Income Taxes
The effective tax rate was a benefit rate of 19.7% on a pre-tax loss for fiscal 2024 compared to a benefit rate of 328.6% on pre-tax income for fiscal 2023. For fiscal 2024, the effective tax rate was impacted by non-deductible share-based compensation and the establishment of valuation allowances against deferred tax assets with limited lives. 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 our 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.
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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 $112 million, or $1.89 per diluted common share, for fiscal 2024, compared to Net income attributable to United Natural Foods, Inc. of $24 million, or $0.40 per diluted common share, for fiscal 2023.
Segment Results of Operations
In evaluating financial performance in each business segment, management primarily uses Net sales and Adjusted EBITDA of its business segments as discussed and reconciled within Note 16—Business Segments in Part II, Item 8 of this Annual Report and the above table within the Executive Overview section. The following tables set forth Net sales and Adjusted EBITDA by segment for the periods indicated.
(in millions) 2024
(53 weeks)
2023
(52 weeks)
Increase (Decrease)
Net sales:
Wholesale $ 29,853 $ 29,142 $ 711
Retail 2,436 2,480 (44)
Other 215 224 (9)
Eliminations (1,524) (1,574) 50
Total Net sales $ 30,980 $ 30,272 $ 708
Adjusted EBITDA:
Wholesale $ 476 $ 540 $ (64)
Retail 8 70 (62)
Other 30 31 (1)
Eliminations 4 (1) 5
Total Adjusted EBITDA $ 518 $ 640 $ (122)
Net Sales
Wholesale Net sales increased $152 million in fiscal 2024 as compared to fiscal 2023, excluding an estimated $559 million benefit from the 53rd week in fiscal 2024. The increase in Wholesale Net sales, excluding the 53rd week, was primarily driven by inflation and new business with existing customers. These increases were partially offset by a decline in unit volumes, as discussed in Results of Operations - Fiscal year ended August 3, 2024 (fiscal 2024) compared to fiscal year ended July 29, 2023 (fiscal 2023) - Net Sales section above.
Retail Net sales decreased $89 million, or 3.6%, in fiscal 2024 as compared to fiscal 2023, excluding an estimated benefit of $45 million from the 53rd week in fiscal 2024. The decrease in Retail Net sales, excluding the 53rd week, was primarily due to lower volume and store closures. Identical store sales decreased 3.7%.
Lower eliminations of Net sales for fiscal 2024 as compared to fiscal 2023 were primarily due to a decrease in Wholesale to Retail sales, which are eliminated upon consolidation.
Adjusted EBITDA
Wholesale Adjusted EBITDA decreased 11.9% for fiscal 2024 as compared to fiscal 2023. The decrease was driven by an increase in operating expenses, partially offset by an increase in gross profit excluding the LIFO charge. Wholesale Gross profit excluding the LIFO charge for fiscal 2024 decreased $57 million, when excluding an estimated $67 million benefit from the 53rd week in fiscal 2024. Wholesale gross profit rate decreased approximately 26 basis points primarily driven by lower levels of procurement gains resulting from decelerating inflation, partially offset by lower shrink expense. Wholesale Operating expense, 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, increased $15 million when excluding an estimated $59 million impact from the 53rd week in fiscal 2024. Wholesale operating expense rate was approximately flat to fiscal 2023 primarily driven by higher incentive compensation expense, offset by lower transportation costs and other operational supply chain efficiencies. Wholesale depreciation and amortization expense increased $4 million for fiscal 2024 compared to fiscal 2023, when excluding an estimated $5 million in additional expense from the 53rd week in fiscal 2024.
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Retail Adjusted EBITDA decreased 88.6% for fiscal 2024 as compared to fiscal 2023. Retail Gross profit excluding the LIFO charge for fiscal 2024 decreased $55 million, when excluding an estimated $11 million benefit from the 53rd week in fiscal 2024. Retail gross profit rate decreased approximately 132 basis points from margin rate investments intended to drive traffic and lower sales volume. Retail Operating expense, 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, increased $10 million when excluding an estimated $11 million impact from the 53rd week in fiscal 2024. Retail operating expense rate increased 129 basis points primarily driven by decreased leverage on higher fixed and variable costs against lower sales. Retail depreciation and amortization expense decreased $2 million for fiscal 2024 compared to fiscal 2023, when excluding an estimated $1 million in additional expense from the 53rd week in fiscal 2024.
LIQUIDITY AND CAPITAL RESOURCES
Highlights
• Total liquidity as of August 3, 2024 was $1,275 million and consisted of the following:
◦ $1,235 million of unused credit under our asset-based revolving credit facility (the “ABL Credit Facility”) as of August 3, 2024, which decreased $245 million from $1,480 million as of July 29, 2023, primarily due to increased borrowings under the ABL Credit Facility utilized to fund voluntary prepayments on the Term Loan Facility (as described below) and payments used in investing activities, partially offset by net cash flow from operating activities and higher levels of availability under the ABL Credit Facility resulting from the First ABL Amendment (defined below); and
◦ $40 million of cash and cash equivalents as of August 3, 2024, which increased $3 million from $37 million as of July 29, 2023.
• Total debt increased $122 million to $2,085 million as of August 3, 2024 from $1,963 million as of July 29, 2023, primarily related to additional net borrowings under the ABL Credit Facility to fund payments used in investing activities and for debt issuance costs, partially offset by net cash flow from operating activities.
• Working capital decreased $21 million to $1,037 million as of August 3, 2024 from $1,058 million as of July 29, 2023, primarily due to a decrease in inventory levels and an increase in accrued compensation and benefits, which were partially offset by a decrease in accounts payable combined with an increase in accounts receivable.
• In the fourth quarter of fiscal 2024, we entered into an amendment to the ABL Loan Agreement (the “First ABL Amendment”) to execute on a First In, Last Out (“FILO”) tranche of incremental loans (the “ABL FILO Loan”) and used the $130 million in proceeds from the ABL FILO Loan and borrowings under the ABL Credit Facility to fund a $145 million voluntary prepayment on the Term Loan Facility.
• Concurrent with the voluntary prepayment on the Term Loan Facility, we entered into an amendment to the Term Loan Agreement (the “Fourth Term Loan Amendment”) to reduce the principal amount of the Term Loan Facility to $500 million and extend the maturity to May 1, 2031.
• In fiscal 2025, scheduled debt maturities are expected to be $6 million. Based on the Company’s Excess Cash Flow (as defined in the Term Loan Agreement) in fiscal 2024, no prepayment from Excess Cash Flow in fiscal 2024 is required to be made in fiscal 2025.
Sources and Uses of Cash
We expect to continue to replenish operating assets and pay down debt obligations with internally generated funds. A significant reduction in operating earnings or the incurrence of operating losses could have a negative impact on our operating cash flow, which may limit our ability to pay down our outstanding indebtedness as planned. Our credit facilities are secured by a substantial portion of our total assets. We expect to be able to fund debt maturities and finance lease liabilities through fiscal 2025 with internally generated funds and borrowings under the ABL Credit Facility.
Our primary sources of liquidity are from internally generated funds and from borrowing capacity under the ABL Credit Facility. We believe our short-term and long-term financing abilities are adequate as a supplement to internally generated cash flows to satisfy debt obligations and fund capital expenditures as opportunities arise. 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, investments in cloud technologies and income tax payments. We typically finance working capital needs with cash provided from operating activities and short-term borrowings. Inventories are managed primarily through demand forecasting and replenishing depleted inventories.
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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 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. Proceeds from the sale of any properties mortgaged and encumbered under our Term Loan Facility are required to be used to make additional Term Loan Facility payments or to be reinvested in the business.
Long-Term Debt
During fiscal 2024, we borrowed a net $301 million under the ABL Credit Facility, including $130 million from the creation of the FILO tranche of incremental loans described above, and made voluntary prepayments on the Term Loan Facility totaling $171 million. 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 and additional information.
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) $220 million, or $210 million if no ABL FILO Loans are then outstanding at such time and (ii) 10% of the aggregate borrowing base. We have not been subject to the fixed charge coverage ratio covenant under the ABL Loan Agreement, including through the filing date of this Annual Report. The Term Loan Agreement, Senior Notes and ABL Loan Agreement contain certain operational and informational covenants customary for debt securities of these types that limit our and our restricted subsidiaries’ ability to, among other things, incur debt, declare or pay dividends or make other distributions to our stockholders, transfer or sell assets, create liens on our assets, engage in transactions with affiliates, and merge, consolidate or sell all or substantially all of our and our subsidiaries’ assets on a consolidated basis. We were in compliance with all such covenants for all periods presented. If we fail to comply with any of these covenants, we may be in default under the applicable debt agreement, and all amounts due thereunder may become immediately due and payable.
In the fourth quarter of fiscal 2024, we entered into an amendment to the ABL Loan Agreement to execute on a FILO tranche of incremental loans under the ABL Loan Agreement. The First ABL Amendment provides for the creation of a FILO tranche of $130 million with an applicable margin equal to Secured Overnight Financing Rate (“SOFR”) plus 2.50% per annum (or a base rate plus 1.50% per annum). The ABL FILO Loan is subject to a borrowing base consisting of specified percentages of the value of eligible accounts receivable, credit card receivables, inventory, pharmacy receivables and pharmacy prescription files. Also in the fourth quarter of fiscal 2024, we entered into the Fourth Term Loan Amendment, which provides for the reduction of the principal amount of the Term Loan Facility to $500 million, the extension of the maturity to May 1, 2031, subject to certain springing maturity conditions, and a change in the applicable margin over a base rate from 2.25% to 3.75% per annum, or over a SOFR rate from 3.25% to 4.75% per annum. In conjunction with the First ABL Amendment and the Fourth Term Loan Amendment, we made a voluntary prepayment of $145 million on the Term Loan Facility funded with the $130 million of ABL FILO Loan proceeds and incremental borrowings under the ABL Credit Facility. Refer to Note 9—Long-Term Debt in Part II, Item 8 of this Annual Report for additional information.
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 2025 or beyond. Based on our Excess Cash Flow (as defined in the Term Loan Agreement) in fiscal 2024, no prepayment from Excess Cash Flow in fiscal 2024 is required to be made in fiscal 2025.
Derivatives and Hedging Activity
We enter into interest rate swap contracts from time to time to mitigate our exposure to changes in market interest rates as part of our strategy to manage our debt portfolio to achieve an overall desired position of notional debt amounts subject to fixed and floating interest rates. Interest rate swap contracts are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures.
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As of August 3, 2024, 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 2.403% to 4.130%, with maturities between October 2024 and June 2028. The fair values of these interest rate derivatives represent a total net asset of $0 million as of August 3, 2024, and are subject to volatility based on changes in market interest rates. Refer to Note 8—Derivatives in Part II, Item 8 and Interest Rate Risk in Part II, Item 7A of this Annual Report for additional information.
From time-to-time, we enter into fixed price fuel supply agreements and foreign currency hedges . As of August 3, 2024, 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 and Cloud Technology Implementation Expenditures
Our capital expenditures for fiscal 2024 were $345 million compared to $323 million for fiscal 2023, an increase of $22 million. Our capital spending for fiscal 2024 and 2023 principally included supply chain and information technology expenditures, including investments in growth initiatives and maintenance expenditures. Fiscal 2024 included $281 million of distribution center improvements, technology and other expenditures, $41 million of investments in new distribution centers, primarily the new Manchester, Pennsylvania distribution center, and $23 million of Retail expenditures. Fiscal 2023 included $290 million of distribution center improvements, technology and other expenditures, and $33 million of Retail expenditures. Cloud technology implementation expenditures, which are included in operating activities in the Consolidated Statements of Cash Flows, were $25 million for fiscal 2024 compared to $21 million for fiscal 2023.
Fiscal 2025 capital and cloud implementation spending is expected to be approximately $300 million and includes projects that automate, optimize and expand our distribution network, as well as our technology platform investments. The components of capital and cloud implementation expenditures for fiscal 2025 will be primarily dependent on the nature of certain contracts to be executed. We expect to finance fiscal 2025 capital and cloud implementation expenditures requirements with cash generated from operations and borrowings under our ABL Credit Facility. Future investments may be financed through long-term debt or borrowings under our ABL Credit Facility and cash from operations.
Cash Flow Information
The following summarizes our Consolidated Statements of Cash Flows:
(in millions) 2024
(53 weeks)
2023
(52 weeks)
Change
Net cash provided by operating activities $ 253 $ 624 $ (371)
Net cash used in investing activities (342) (339) (3)
Net cash provided by (used in) financing activities 92 (292) 384
Effect of exchange rate on cash — — —
Net increase (decrease) in cash and cash equivalents 3 (7) 10
Cash and cash equivalents, at beginning of period 37 44 (7)
Cash and cash equivalents at end of period $ 40 $ 37 $ 3
Fiscal 2024 compared to Fiscal 2023
The decrease in net cash provided by operating activities was primarily due to lower levels of cash generated by net working capital, including lower proceeds received from the monetization of certain receivables compared to fiscal 2023 and higher receivables levels from sales growth in fiscal 2024. These decreases in cash provided by operating activities were partially offset by higher levels of accrued incentive compensation net of related payments and lower inventory levels net of related payables in fiscal 2024. In addition, lower cash was generated from net income in fiscal 2024.
The increase in net cash used in investing activities was primarily due to increased payments for capital expenditures in fiscal 2024.
The increase in net cash provided by financing activities was primarily due to an increase in net borrowings under the ABL Credit Facility resulting from decreases in net cash provided by operating activities, increases in net cash used in investing activities and the creation of the FILO tranche of incremental loans discussed above, and a decrease in cash used to repurchase common stock.
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Other Obligations and Commitments
Our principal contractual obligations and commitments consist of obligations under our long-term debt, interest on long-term debt, operating and finance leases, purchase obligations, self-insurance liabilities and multiemployer plan withdrawal liabilities.
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 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. The future amount and timing of interest expense payments are expected to vary with the amount and then prevailing contractual interest rates over our debt as discussed in Interest Rate Risk in Part II, Item 7A of this Annual Report.
Pension and Other Postretirement Benefit Obligations
We contributed $1 million and $1 million to our defined benefit pension and other postretirement benefit plans, respectively, in fiscal 2024. In fiscal 2025, no minimum pension contributions are required to be made to the SUPERVALU INC. 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 2025. 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. We assess the relative attractiveness of the use of cash to accelerate contributions considering such factors as expected return on assets, discount rates, cost of debt, reducing or eliminating required Pension Benefit Guaranty Corporation variable rate premiums or in order to achieve exemption from participant notices of underfunding.
Off-Balance Sheet Multiemployer Pension Arrangements
We contribute to various multiemployer pension plans under collective bargaining agreements, primarily defined benefit pension plans. These multiemployer plans generally provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. 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 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. We are only one of a number of employers contributing to these plans and the underfunding is not a direct obligation or liability to us.
Our contributions can fluctuate from year to year due to store closures, employer participation within the respective plans and reductions in headcount. Our contributions to these plans could increase in the near term. However, the amount of any increase or decrease in contributions will depend on a variety of factors, including the results of our collective bargaining efforts, investment returns on the assets held in the plans, actions taken by the trustees who manage the plans and requirements under the Pension Protection Act of 2006, the Multiemployer Pension Reform Act and Section 412(e) of the Internal Revenue Code. Furthermore, if we were to significantly reduce contributions, exit certain markets or otherwise cease making contributions to these plans, we could trigger a partial or complete withdrawal that could require us to record a withdrawal liability obligation and make withdrawal liability payments to the fund. Expense is recognized in connection with these plans as contributions are funded, in accordance with GAAP. We made contributions to these plans, and recognized expense of $47 million, $48 million and $45 million in fiscal 2024, 2023 and 2022, respectively. In fiscal 2025, we expect to contribute approximately $51 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. Any future withdrawal liability would be recorded when it is probable that a liability exists and can be reasonably estimated, in accordance with GAAP. Any triggered withdrawal obligation could result in a material charge and payment obligations that would be required to be made over an extended period of time.
We also make contributions to multiemployer health and welfare plans in amounts set forth in the related collective bargaining agreements. A small minority of collective bargaining agreements contain reserve requirements that may trigger unanticipated contributions resulting in increased healthcare expenses. If these healthcare provisions cannot be renegotiated in a manner that reduces the prospective healthcare cost as we intend, our Operating expenses could increase in the future.
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Refer to Note 13—Benefit Plans in Part II, Item 8 of this Annual Report for additional information regarding the plans in which we participate.
Share Repurchases
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”). 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 2024. As of August 3, 2024, 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. 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 estimates reflect our more subjective or complex judgments and estimates used in the preparation of our Consolidated Financial Statements.
Inventories
Inventories are valued at the lower of cost or market. Substantially all of our inventories consist of finished goods. Inventories are recorded net of vendor allowances and cash discounts. We evaluate inventory shortages (shrink) throughout each fiscal year based on 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 is used to value cost of goods sold as inventory is sold in an inflationary environment. During fiscal 2024, inventory quantities in certain LIFO layers were reduced. These reductions resulted in a liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the cost of fiscal 2024 purchases, the effect of which decreased Cost of sales by approximately $15 million in fiscal 2024. If the first-in, first-out (“FIFO”) method had been used, Inventories, net, would have been higher by approximately $351 million and $344 million at August 3, 2024 and July 29, 2023, respectively. As of August 3, 2024, approximately $1.9 billion or 82% of inventory was valued under the LIFO method, before the application of any LIFO reserve, and primarily included grocery, frozen food and general merchandise products, with the remaining inventory valued under the first-in, first-out method and primarily included meat, dairy and deli products. When holding inventory levels and mix constant, as of August 3, 2024, we estimate a 50 basis point increase in the inflation rate on our ending LIFO-based inventory would result in an $8 million increase in the LIFO charge on an annualized basis.
Vendor funds
We receive funds from many of the vendors whose products we buy for resale. These vendor funds are generally provided to increase the purchasing and sell-through of the related products. We receive vendor funds for a variety of merchandising activities: placement of the vendors’ products in our advertising; display of the vendors’ products in prominent locations in our stores; support for the introduction of new products into our stores and distribution centers; exclusivity rights in certain categories; and compensation for temporary price reductions offered on products held for sale. We also receive vendor funds for buying activities such as volume commitment rebates, credits for purchasing products in advance of their need and cash discounts for the early payment of merchandise purchases. The majority of our vendor fund contracts have terms of less than a year, although some of the contracts have terms of longer than one year.
We recognize vendor funds for merchandising activities as a reduction of Cost of sales when the related products are sold, unless it has been determined that a discrete identifiable benefit has been provided to the vendor, in which case the related amounts are recognized within Net sales and represent less than 0.5% of total Net sales. Vendor funds that have been earned as a result of completing the required performance under the terms of the underlying agreements but for which the product has not yet been sold are recognized as reductions to the value of on-hand inventory.
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The amount and timing of recognition of vendor funds as well as the amount of vendor funds to be recognized as a reduction to ending inventory requires management judgment and estimates. Management determines these amounts based on estimates of current year purchase volume using forecast and historical data and a review of average inventory turnover data. These judgments and estimates impact our reported Gross profit, Operating income and inventory amounts. The historical estimates have been reliable in the past, and we believe our methodology will continue to be reliable in the future. Based on previous experience, we do not expect significant changes in the level of vendor support. However, if such changes were to occur, Cost of sales and Net sales could change, depending on the specific vendors involved. If vendor advertising allowances were substantially reduced or eliminated, we would consider changing the volume, type and frequency of the advertising, which could increase or decrease our advertising exp ense.
Benefit plans
We sponsor pension and other postretirement plans in various forms covering substantially all employees who meet eligibility requirements. 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 plan and certain supplemental executive retirement plans are closed to new participants and service crediting ended for all participants.
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.
The determination of our obligation and related expense for Company-sponsored pension and other postretirement benefits is dependent, in part, on management’s selection of certain actuarial assumptions used in calculating these amounts. These assumptions include, among other things, the discount rate and the expected long-term rate of return on plan assets. We measure our defined benefit pension and other postretirement plan obligations as of the nearest calendar month end. Refer to Note 13—Benefit Plans in Part II, Item 8 of this Annual Report for information related to the actuarial assumptions used in determining pension and postretirement healthcare liabilities and expenses.
Discount rates
We review and select the discount rate to be used in connection with our pension and other postretirement obligations annually. The discount rate reflects the current rate at which the associated liabilities could be effectively settled at the end of the year. We set our rate to reflect the yield of a portfolio of high quality, fixed-income debt instruments that would produce cash flows sufficient in timing and amount to settle projected future benefits.
We utilize the “full yield curve” approach for determining the interest and service cost components of net periodic benefit cost for defined benefit pension and other postretirement benefit plans. Under this method, the discount rate assumption used in the interest and service cost components of net periodic benefit cost is built through applying the specific spot rates along the yield curve used in the determination of the benefit obligation described above, to the relevant projected future cash flows of our pension and other postretirement benefit plans. We believe the “full yield curve” approach reflects a greater correlation between projected benefit cash flows and the corresponding yield curve spot rates and provides a more precise measurement of interest and service costs. Each 25-basis point reduction in the discount rate would increase our projected pension benefit obligation by $36 million, as of August 3, 2024, and for fiscal 2024 would increase Net periodic benefit income by approximately $2 million.
Expected rate of return on plan assets
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 was 6.25% for fiscal 2024. The 10-year rolling average annualized return for the SUPERVALU INC. Retirement Plan is approximately 7.6% based on returns from 2015 to 2024. Each 25-basis point reduction in expected return on plan assets would decrease Net periodic benefit income for fiscal 2024 by approximately $4 million.
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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. Retirement Plan over the remaining life expectancy of inactive participants based on our determination that almost all of the defined benefit pension plan participants are inactive and the plan is frozen to new participants. For the purposes of inactive participants, we utilized a 90% threshold established under our policy.
Multiemployer pension plans
We contribute to various multiemployer pension plans based on obligations arising from collective bargaining agreements. These multiemployer pension plans provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Plan trustees are typically responsible for determining the level of benefits to be provided to participants as well as such matters as the investment of the assets and the administration of the plans.
We continue to evaluate and address our potential exposure to underfunded multiemployer pension plans as it relates to our associates who are or were beneficiaries of these plans. 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. 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 multiemployer pension plans. Under ARPA, eligible multiemployer pension plans can apply to receive a cash payment intended to keep the plan solvent and able to pay pension benefits through the plan year ending 2051. As of the end of fiscal 2024, 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. 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.
Self-insurance liabilities
We are primarily self-insured for workers’ compensation, general and automobile liability insurance. It is our policy to record the self-insured portions of our workers’ compensation, general and automobile liabilities based upon actuarial methods of estimating the future cost of claims and related expenses that have been reported but not settled, and that have been incurred but not yet reported. Any projection of losses concerning these liabilities is subject to a considerable degree of variability. Among the causes of this variability are unpredictable external factors affecting litigation trends, benefit level changes and claim settlement patterns. If actual claims incurred are greater than those anticipated, our reserves may be insufficient and additional costs could be recorded in our Consolidated Financial Statements. Accruals for workers’ compensation, general and automobile liabilities totaled $89 million and $97 million as of August 3, 2024 and July 29, 2023, respectively.
Recoverability of long-lived assets
We review long-lived assets, including definite-lived intangible assets at least annually, and on an interim basis if events occur or changes in circumstances indicate that the carrying value of the assets may not be recoverable. We evaluate these assets at the asset-group level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Cash flows expected to be generated by the related assets are estimated over the assets’ useful lives based on updated projections. When the undiscounted future cash flows are not sufficient to recover an asset’s carrying amount, the fair value is compared to the carrying value to determine the loss to be recorded.
Estimates of future cash flows and expected sales prices are judgments based on the Company’s experience and knowledge of operations. 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.
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As part of our quarterly procedures and annual impairment assessment, we recognized a $21 million non-cash asset impairment charge related to one of our corporate-owned office locations in the first quarter of fiscal 2024, a $7 million non-cash asset impairment charge related to the decision to close certain retail store locations in the third quarter of 2024 and a $15 million non-cash impairment charge related to the decision to close certain leased and owned distribution center locations in the fourth quarter of fiscal 2024.
Income taxes
The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized within the provision for income tax in the period that includes the enactment date.
The calculation of the Company’s tax liabilities includes addressing uncertainties in the application of complex tax regulations and is based on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Addressing these uncertainties requires judgment and estimates; however, actual results could differ, and we may be exposed to losses or gains. Our effective tax rate in a given financial statement period could be affected based on favorable or unfavorable tax settlements. Unfavorable tax settlements will generally require the use of cash and may result in an increase to our effective tax rate in the period of resolution. Favorable tax settlements may be recognized as a reduction to our effective tax rate in the period of resolution.
The Company regularly reviews its deferred tax assets for recoverability to evaluate whether it is more likely than not that they will be realized. In making this evaluation, the Company considers the statutory recovery periods for the assets, along with available sources of future taxable income, including reversals of existing and future taxable temporary differences, tax planning strategies, history of taxable income and projections of future income. The Company gives more significance to objectively verifiable evidence, such as the existence of deferred tax liabilities that are forecast to generate taxable income within the relevant carryover periods and a history of earnings. A valuation allowance is provided when the Company concludes, based on all available evidence, that it is more likely than not that the deferred tax assets will not be realized during the applicable recovery period.
Recently Issued Financial Accounting Standards
For a discussion of recently issued financial accounting standards, refer to Note 2—Recently Adopted and Issued Accounting Pronouncements in Part II, Item 8 of this Annual Report.