Item 2. 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
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. 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 or false. 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:
•the impact and duration of the COVID-19 pandemic;
•our dependence on principal customers;
•our sensitivity to general economic conditions including changes in disposable income levels and consumer spending trends;
•our ability to realize anticipated benefits of our acquisitions and dispositions, in particular, our acquisition of SUPERVALU INC. (“Supervalu”);
•our reliance on the continued growth in sales of our higher margin natural and organic foods and non-food products in comparison to lower margin conventional grocery products;
•increased competition in our industry as a result of increased distribution of natural, organic and specialty products, and direct distribution of those products by large retailers and online distributors;
•the possibility that restructuring, asset impairment, and other charges and costs we may incur in connection with the sale or closure of our retail operations will exceed our current expectations;
•increased competition as a result of continuing consolidation of retailers in the natural product industry and the growth of supernatural chains;
•the addition or loss of significant customers or material changes to our relationships with these customers;
•union-organizing activities that could cause labor relations difficulties and increased costs;
•our ability to operate, and rely on third-parties to operate, reliable and secure technology systems;
•the relatively low margins of our business;
•moderated supplier promotional activity, including decreased forward buying opportunities;
•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 additional asset impairment charges;
•our sensitivity to inflationary and deflationary pressures;
•the potential for disruptions in our supply chain or our distribution capabilities by circumstances beyond our control, including a health epidemic;
•the risk of interruption of supplies due to lack of long-term contracts, severe weather, work stoppages or otherwise;
•volatility in fuel costs;
•volatility in foreign exchange rates; and
•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 August 1, 2020 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
Business Overview
As a leading distributor of natural, organic, specialty, produce and conventional grocery and non-food products, and provider of support services 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. We offer more than 275,000 products consisting of national, regional and private label brands grouped into six product categories: grocery and general merchandise; produce; perishables and frozen foods; nutritional supplements and sports nutrition; bulk and food service products; and personal care items. Through our October 2018 acquisition of Supervalu, we are transforming into North America’s premier wholesaler with 58 distribution centers and warehouses representing approximately 30 million square feet of warehouse space. Our business is classified into two reportable segments: Wholesale and Retail; and also includes a manufacturing division and a branded product line division.
Growth Drivers
A key component of our business and growth strategy has been to acquire distribution companies differentiated by product offerings, service offerings and market area. In fiscal 2019, the acquisition of Supervalu accelerated our “build out the store” strategy, diversified our customer base, enabled cross-selling opportunities, expanded our market reach and scale, enhanced our technology, capacity and systems, and is expected to continue to deliver synergies and accelerate growth. We believe the Supervalu acquisition allows us to better serve our wholesale customers’ needs and compete in the current environment by providing additional warehouse and transportation capacity, which enabled us to provide a broader array of products to our customers. As one of the largest wholesale grocery distributors in North America, and in light of the continued expansion of our distribution network and “build out the store” strategy, we believe we are well positioned to leverage our infrastructure in the current economic and social environment to continue to serve our customers and the communities in which we operate, and are actively pursuing new customers.
We believe our significant scale and footprint will generate long-term shareholder value by positioning us to continue to grow sales of natural, organic, specialty, produce and conventional grocery and non-food products, including our Private Brands. We also believe we have an opportunity to sell additional services to our customers to help them more efficiently operate their business while leveraging the infrastructure investments we have made. Services we sell to our customers include coupon processing, consumer marketing, retail technology and payments and consumer services. We have realized significant cost and revenue synergies from the acquisition of Supervalu by leveraging the scale and resources of the combined company, cross-selling to our customers, integrating our merchandising offerings into existing warehouses, optimizing our network footprint to lower our cost structure and eliminating redundant administrative costs. We expect to realize additional cost and revenue synergies in the future.
We expect the benefits of our significant scale, product and service offerings and nationwide footprint to attract new customers, such as Key Food Stores co-operative, Inc. (“Key Food”). On October 6, 2020, we announced UNFI had been selected as the primary grocery wholesaler by Key Food, a Co-Operative of 315 member-owned and corporate grocery stores located in the Northeast and Florida. UNFI’s supply agreement with Key Food has a term of 10 years with expected sales over that time period of approximately $10 billion.
We have been the primary distributor to Whole Foods Market for more than 20 years. We continue to serve as the primary distributor to Whole Foods Market in all of its regions in the United States pursuant to an amended distribution agreement. On March 3, 2021, we entered into an amendment to our distribution agreement dated October 30, 2015. The Amendment extended the term of the distribution agreement from September 28, 2025 to September 27, 2027.
We currently operate 71 Retail grocery stores acquired in the Supervalu acquisition. We intend to maximize the value of these assets while, over time, thoughtfully and economically divesting these stores. However, we no longer expect to divest Retail within one year and, as a result, beginning in the fourth quarter of fiscal 2020, prior period information in our Condensed Consolidated Financial Statements included in this Quarterly Report has been revised to reclassify Retail from discontinued operations to continuing operations from information previously presented in our Quarterly Reports. This change in financial statement presentation resulted in the inclusion of Retail’s results of operations, financial position, cash flows and related disclosures within continuing operations. Prior periods presented in the Condensed Consolidated Financial Statements have been conformed to the current period presentation, resulting in Retail being presented in continuing operations for all periods.
Trends and Other Factors Affecting our Business
Our results are impacted by macroeconomic and demographic trends, and changes in the food distribution market structure. Changes in trends in consumer behavior could impact our results. Over the past several decades, total food expenditures on a constant dollar basis within the United States has continued to increase in total, and the focus in recent decades on natural, organic and specialty foods has benefited the Company; however, consumer spending in the food-away-from-home industry had increased steadily as a percentage of total food expenditures. This trend paused during the 2008 recession, and then continued to increase.
In fiscal 2020, the COVID-19 pandemic, which we refer to as the pandemic, caused a significant increase in food-at-home expenditures as a percentage of total food expenditures. We experienced year-over-year increases in sales and gross profit due to higher Wholesale customer purchases. We expect that food-at-home expenditures as a percentage of total food expenditures will remain higher than recent years until consumer behaviors return to pre-pandemic patterns. We believe that changes in work being done outside of the traditional office setting will contribute to more food being consumed at home. In addition, the elevated levels of unemployment and underemployment due to the pandemic are expected to persist for some time and even after the near-term impact of the pandemic has passed. In general, economic recessions usually result in higher food-at-home expenditures, which would be expected to continue to benefit our customers and result in higher sales. The pandemic also drove significant growth in eCommerce utilization by grocery consumers, and we expect that trend to continue. We expect to benefit from this trend through the growth of our traditional eCommerce customers, our EasyOptions, a business-verified buyer’s site for retailers, which directly services non-traditional customers, such as bakeries or yoga studios, and through customers adopting our turnkey eCommerce platform.
Beginning in the third quarter of fiscal 2020, in response to the outbreak of the pandemic, we took actions to respond to the pandemic, support our associates’ safety and well-being and maximize our logistics network to serve the communities we supply. Our business model allows us to leverage sales increases, and provides growth in operating earnings margin. We have been able to leverage the fixed and variable costs of our supply chain network and administrative expenses. We have incurred incremental costs related to the pandemic, including additional costs for safety protocols and procedures at our distribution centers and retail stores. Despite incremental labor and operating costs, additional volume experienced by our distribution network and retail stores drove higher leverage on fixed facility costs, semi-variable costs and general and administrative expenses.
We expect to continue to benefit from elevated sales and margin buying activity as compared to historical periods prior to the pandemic while food-at-home expenditures as a percentage of total food expenditures remains higher than recent historical periods, and higher on a year-over-year basis. Trends in increased sales and gross margin benefits have lessened since the initial onset of the pandemic. The ultimate impact on our results is dependent upon the severity and duration of the pandemic and any economic downturn, food-at-home purchasing levels and actions taken by governmental authorities and other third parties in response to the pandemic, each of which is uncertain and rapidly changing. Any of these disruptions could adversely impact our business and results of operations. Considerable uncertainty remains regarding the future impact of the pandemic on our business, which is discussed further in Part I. Item 1A Risk Factors of our Annual Report on Form 10-K for the year ended August 1, 2020.
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. We seek to obtain security interests and other credit support in connection with the financial accommodations we extend these customers; however, we may incur additional credit or inventory charges related to our customers, as we expect the competitive environment to continue to lead to financial stress on some customers. The magnitude of these risks increases as the size of our Wholesale customers increases.
Distribution Center Network
Network Optimization and Construction
Within the Pacific Northwest, we completed the consolidation of the volume of five distribution centers and their related supporting off-site storage facilities into two distribution centers during fiscal 2020. We expect to achieve synergies and cost savings through eliminating inefficiencies, including incurring lower operating, shrink and off-site storage expenses. We also expect that the optimization of the Pacific Northwest distribution network will help deliver meaningful synergies contemplated in the Supervalu acquisition. We expanded the Ridgefield, WA distribution center to enhance customer product offerings, create more efficient inventory management, streamline operations and incorporate greater technology to deliver a better customer experience. We are now supplying customers served by former Pacific Northwest locations from our Centralia, WA, Ridgefield, WA and Gilroy, CA distribution centers. In order to maintain service levels of these higher volume Pacific Northwest distribution centers, we incurred incremental operating costs in the first quarter of fiscal 2021 that we believe temporarily reduced the realization of synergy benefits from this network consolidation.
To support our continued growth on the East coast, we entered into a new lease agreement for approximately 1.3 million square foot facility. The lease agreement commenced in the third quarter of fiscal 2021 when we took control of the facility to make our tenant improvements. We expect to recognize an operating lease asset and an operating lease liability for this distribution center in the third quarter of fiscal 2021 and expect to begin distribution out of this facility in the second half of calendar 2021.
To support our continued growth within southern California, we began operating a newly leased facility with approximately 1.2 million square feet upon completion of its construction in the fourth quarter of fiscal 2020. This facility provides significant capacity to service our customers in this market. On February 24, 2020, we executed a purchase option with a delayed purchase provision to acquire the real property of this distribution center, agreeing to pay approximately $151.9 million for the facility, subject to finalization. We expect to engage a real estate partner to monetize the real property of this location, including through a sale-leaseback transaction that would ultimately reduce rents paid for this property compared to current levels, which we expect would occur on or before June 2022.
We continue to evaluate our distribution center network to optimize its performance and expect to incur incremental expenses related to any future network realignment and are working to both minimize these costs and obtain new business to further improve the efficiency of our transforming distribution network.
Distribution Center Sales
In the second quarter of fiscal 2021, we received $35.1 million from the collection of a short-term note receivable, representing the remaining proceeds related to the fiscal 2020 sale of a distribution center. As we consolidate our distribution network, we may sell additional owned facilities or exit leased facilities.
Operating Efficiency
As part of our “one company” approach, we are in the process of converting to a single national warehouse management and procurement system to integrate our existing facilities, including acquired Supervalu facilities, onto one nationalized platform across the organization. We continue to focus on the automation of our new or expanded distribution centers that are at different stages of construction and implementation. These steps and others are intended to promote operational efficiencies and improve operating expenses as a percentage of net sales.
Divestiture of Retail Operations
We have announced our intention to thoughtfully and economically divest our retail businesses acquired as part of the Supervalu acquisition in an efficient and economic manner in order to focus on our core wholesale distribution business. During the fourth quarter of fiscal 2020, we determined we no longer met the held for sale criterion for a probable sale to be completed within 12 months for the Cub Foods business and the majority of the remaining Shoppers locations, collectively referred to as the Retail segment. The Retail segment excludes retail banners and stores previously sold or closed. We reviewed our reportable segments and determined we were required to report Retail as a separate segment. As a result, we revised our Condensed Consolidated Financial Statements to reclassify Retail from discontinued operations to continuing operations. This change in financial statement presentation resulted in the inclusion of Retail’s results of operations, financial position, cash flows and related disclosures within continuing operations. Prior periods presented in the Condensed Consolidated Financial Statements have been conformed to the current period presentation, resulting in Retail being presented in continuing operations for all periods.
The revision of our Condensed Consolidated Statements of Operations to present Retail within continuing operations resulted in an increase in our consolidated net sales, gross profit and operating expenses, and an increase in consolidated gross profit as a percentage of net sales, which was partially offset by an increase in operating expenses as a percent of net sales. In order to present Retail’s results of operations within continuing operations, Wholesale sales to Retail have been eliminated upon consolidation. The Wholesale segment’s net sales to discontinued operations retail stores are eliminated within the Wholesale segment.
Our strategy remains unchanged and we expect to divest all of our Retail operations in the future. As part of that process we plan to maximize value as part of the divestiture process, including limiting liabilities and stranded costs associated with these divestitures. We expect to obtain ongoing supply relationships with the purchasers of some of these retail operations, but some reductions in supply volume may result from the divestiture of certain of these retail operations. Actions associated with retail divestitures and potential resulting adjustments to our core cost structure for our wholesale food distribution business, are expected to generate headcount reductions and other costs and charges. These costs and charges, which may be material, include multiemployer plan charges, severance costs, store closure charges, and related costs. A withdrawal from a multiemployer pension plan may result in an obligation to make material payments over an extended period of time, or one-time lump sum payments on a net present value basis. In addition, we are evaluating various options to address our off-balance sheet liability under certain of our multiemployer pension plans, irrespective of the retail divestiture process, which actions may result in significant costs or charges. The extent of these costs and charges will be determined based on outcomes achieved under the process undertaken to minimize or eliminate the liability for the respective multiemployer pension plan. At this time, however, we are unable to make an estimate with reasonable certainty of the amount or type of costs and charges expected to be incurred in connection with the foregoing actions.
Our discontinued operations as of the end of the second quarter of fiscal 2021 include four Shoppers stores, and for historical periods, results of discontinued operations include the Hornbacher’s and Shop ‘n Save and Shop ‘n Save East retail banners, which were divested in fiscal 2019, and Shoppers stores that were sold or closed in fiscal 2020 and fiscal 2021. In addition, cash flows from discontinued operations include real estate sales related to those historical retail operations. These retail assets have been classified as held for sale as of the Supervalu acquisition date, and the results of operations, financial position and cash flows directly attributable to these operations are reported within discontinued operations in our Condensed Consolidated Financial Statements for all periods presented. As of the Supervalu acquisition date, retail assets and liabilities were recorded at their estimated fair value less costs to sell, and subsequent to that date, we reviewed the fair value, less cost to sell, of these disposal groups.
We may incur additional costs and charges in the future related to the divestiture of Retail if these locations are subsequently sold, indicators exist that the business may be impaired, or if we incur employee-related charges or wind-down costs.
Professional Services Agreements
In connection with the sale of Save-A-Lot on December 5, 2016, Supervalu entered into a services agreement (the “Services Agreement”) with Moran Foods, LLC, the entity that operates the Save-A-Lot business. Pursuant to the Services Agreement, we provide certain technical, human resources, finance and other operational services to Save-A-Lot for a term of five years, on the terms and subject to the conditions set forth therein. The initial annual base charge under the Services Agreement is $30 million, subject to adjustments. During fiscal 2021, we expect to earn less than $20 million under this agreement. We expect that services provided under the Services Agreement will wind down at or near the end of the initial term in December 2021. At that time, we would lose the revenue associated with this agreement, and if we are not able to eliminate fixed or variable costs associated with servicing this agreement concurrent with the decline in revenue, we would incur a decrease in operating profit.
Impact of Inflation or Deflation
We monitor product cost inflation and deflation and evaluate whether to absorb cost increases or decreases, or pass on pricing changes to our customers. We experienced a mix of inflation and deflation across product categories during the second quarter of fiscal 2021. In the aggregate across all of our legacy businesses and taking into account the mix of products, management estimates our businesses experienced cost inflation of less than one percent in the second quarter of fiscal 2021. 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, deflation has the effect of decreasing sales. Under the 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.
Business Performance Assessment and Composition of Condensed Consolidated Statements of Operations
Net sales
Our net sales consist primarily of sales of natural, organic, specialty, produce and conventional grocery and non-food products, and provider of support services to retailers, 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 the cost of transportation necessary to bring the product to, or move product between, our various distribution centers, partially offset by consideration received from suppliers in connection with the purchase or promotion of the suppliers’ products. Cost of sales also includes amounts incurred by us at our manufacturing subsidiary, Woodstock Farms Manufacturing, for inbound transportation costs. Our gross margin may not be comparable to other similar companies within our industry that may include all costs related to their distribution network in their costs of sales rather than as operating expenses.
Operating expenses
Operating expenses include salaries and wages, employee benefits, warehousing and delivery, selling, occupancy, insurance, administrative, share-based compensation, depreciation, and amortization expense. These expenses relate to warehousing and delivery expenses including purchasing, receiving, selecting and outbound transportation expenses.
Restructuring, acquisition and integration expenses
Restructuring, acquisition and integration expenses reflect expenses resulting from restructuring activities, including severance costs, change-in-control related charges, facility closure asset impairment charges and costs, stock-based compensation acceleration charges, and acquisition and integration expenses. Integration expenses include incremental expenses related to combining facilities required to optimize our distribution network as a result of acquisitions.
Interest expense, net
Interest expense, net includes primarily interest expense on long-term debt, net of capitalized interest, interest expense on finance and direct finance lease obligations, and amortization of financing costs and discounts.
Net periodic benefit income, excluding service cost
Net periodic benefit income, excluding service cost reflects the recognition of expected returns on benefit plan assets in excess of interest costs.
Adjusted EBITDA
Our Condensed 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 are items that do not reflect management’s assessment of on-going business performance.
We believe Adjusted EBITDA is useful to investors and financial institutions because it provides additional understanding of 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 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 Quarterly 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 inclusive of continuing and discontinued operations results, which we reconcile by adding Net income (loss) from continuing operations, less net income attributable to noncontrolling interests, plus Total other expense, net and (Benefit) provision for income taxes, plus Depreciation and amortization calculated in accordance with GAAP, plus non-GAAP adjustments for Share-based compensation, Restructuring, acquisition and integration related expenses, Goodwill and asset impairment charges, Loss (gain) on sale of assets, certain legal charges and gains, certain other non-cash charges or items, as determined by management, plus Adjusted EBITDA of discontinued operations calculated in a manner consistent with the results of continuing operations, outlined above.
Assessment of Our Business Results
The following table sets forth a summary of our results of operations and Adjusted EBITDA for the periods indicated. We have revised the following table for the presentation of Retail within continuing operations discussed in Note 1—Significant Accounting Policies in Part II, Item 8 of the Annual Report on Form 10-K.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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13-Week Period Ended
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|
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26-Week Period Ended
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(in thousands)
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January 30, 2021
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February 1, 2020
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Change
|
|
January 30, 2021
|
|
February 1, 2020
|
|
Change
|
Net sales
|
$
|
6,888,133
|
|
|
$
|
6,431,382
|
|
|
$
|
456,751
|
|
|
$
|
13,560,740
|
|
|
$
|
12,727,994
|
|
|
$
|
832,746
|
|
Cost of sales
|
5,897,774
|
|
|
5,514,057
|
|
|
383,717
|
|
|
11,603,882
|
|
|
10,903,458
|
|
|
700,424
|
|
Gross profit
|
990,359
|
|
|
917,325
|
|
|
73,034
|
|
|
1,956,858
|
|
|
1,824,536
|
|
|
132,322
|
|
Operating expenses
|
866,880
|
|
|
862,732
|
|
|
4,148
|
|
|
1,767,842
|
|
|
1,746,420
|
|
|
21,422
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|
Goodwill and asset impairment charges
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
425,405
|
|
|
(425,405)
|
|
Restructuring, acquisition and integration related expenses
|
17,783
|
|
|
36,522
|
|
|
(18,739)
|
|
|
34,211
|
|
|
51,194
|
|
|
(16,983)
|
|
Loss on sale of assets
|
399
|
|
|
524
|
|
|
(125)
|
|
|
169
|
|
|
434
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|
|
(265)
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|
Operating income (loss)
|
105,297
|
|
|
17,547
|
|
|
87,750
|
|
|
154,636
|
|
|
(398,917)
|
|
|
553,553
|
|
Other expense (income):
|
|
|
|
|
|
|
|
|
|
|
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Net periodic benefit income, excluding service cost
|
(17,127)
|
|
|
(3,277)
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|
|
(13,850)
|
|
|
(34,160)
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|
|
(14,661)
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|
|
(19,499)
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|
Interest expense, net
|
50,944
|
|
|
48,836
|
|
|
2,108
|
|
|
120,077
|
|
|
98,545
|
|
|
21,532
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Other, net
|
(1,674)
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|
|
(1,220)
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|
|
(454)
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|
|
(2,472)
|
|
|
(1,620)
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|
|
(852)
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|
Total other expense, net
|
32,143
|
|
|
44,339
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|
|
(12,196)
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|
|
83,445
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|
|
82,264
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|
|
1,181
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|
Income (loss) from continuing operations before income taxes
|
73,154
|
|
|
(26,792)
|
|
|
99,946
|
|
|
71,191
|
|
|
(481,181)
|
|
|
552,372
|
|
Provision (benefit) for income taxes
|
16,392
|
|
|
(12,808)
|
|
|
29,200
|
|
|
15,401
|
|
|
(79,763)
|
|
|
95,164
|
|
Net income (loss) from continuing operations
|
56,762
|
|
|
(13,984)
|
|
|
70,746
|
|
|
55,790
|
|
|
(401,418)
|
|
|
457,208
|
|
Income (loss) from discontinued operations, net of tax
|
3,803
|
|
|
(16,076)
|
|
|
19,879
|
|
|
5,099
|
|
|
(12,050)
|
|
|
17,149
|
|
Net income (loss) including noncontrolling interests
|
60,565
|
|
|
(30,060)
|
|
|
90,625
|
|
|
60,889
|
|
|
(413,468)
|
|
|
474,357
|
|
Less net income attributable to noncontrolling interests
|
(1,605)
|
|
|
(650)
|
|
|
(955)
|
|
|
(2,972)
|
|
|
(1,169)
|
|
|
(1,803)
|
|
Net income (loss) attributable to United Natural Foods, Inc.
|
$
|
58,960
|
|
|
$
|
(30,710)
|
|
|
$
|
89,670
|
|
|
$
|
57,917
|
|
|
$
|
(414,637)
|
|
|
$
|
472,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
$
|
206,295
|
|
|
$
|
131,110
|
|
|
$
|
75,185
|
|
|
$
|
365,252
|
|
|
$
|
252,804
|
|
|
$
|
112,448
|
|
The following table reconciles Adjusted EBITDA to Net income (loss) from continuing operations and to Income (loss) from discontinued operations, net of tax.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13-Week Period Ended
|
|
26-Week Period Ended
|
(in thousands)
|
|
January 30, 2021
|
|
February 1, 2020
|
|
January 30, 2021
|
|
February 1, 2020
|
Net income (loss) from continuing operations
|
|
$
|
56,762
|
|
|
$
|
(13,984)
|
|
|
$
|
55,790
|
|
|
$
|
(401,418)
|
|
Adjustments to continuing operations net income (loss):
|
|
|
|
|
|
|
|
|
Less net income attributable to noncontrolling interests
|
|
(1,605)
|
|
|
(650)
|
|
|
(2,972)
|
|
|
(1,169)
|
|
Total other expense, net
|
|
32,143
|
|
|
44,339
|
|
|
83,445
|
|
|
82,264
|
|
Provision (benefit) for income taxes
|
|
16,392
|
|
|
(12,808)
|
|
|
15,401
|
|
|
(79,763)
|
|
Depreciation and amortization
|
|
66,534
|
|
|
69,219
|
|
|
143,723
|
|
|
144,360
|
|
Share-based compensation
|
|
12,673
|
|
|
5,134
|
|
|
26,822
|
|
|
9,059
|
|
Goodwill and asset impairment charges(1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
425,405
|
|
Restructuring, acquisition and integration related expenses(2)
|
|
17,783
|
|
|
36,522
|
|
|
34,211
|
|
|
51,194
|
|
Loss on sale of assets
|
|
399
|
|
|
524
|
|
|
169
|
|
|
434
|
|
Note receivable charges(3)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12,516
|
|
|
|
|
|
|
|
|
|
|
Legal (settlement income) reserve charge(4)
|
|
—
|
|
|
(654)
|
|
|
—
|
|
|
1,196
|
|
Other retail expense(5)
|
|
1,394
|
|
|
—
|
|
|
3,003
|
|
|
—
|
|
Adjusted EBITDA of continuing operations
|
|
202,475
|
|
|
127,642
|
|
|
359,592
|
|
|
244,078
|
|
Adjusted EBITDA of discontinued operations(6)
|
|
3,820
|
|
|
3,468
|
|
|
5,660
|
|
|
8,726
|
|
Adjusted EBITDA
|
|
$
|
206,295
|
|
|
$
|
131,110
|
|
|
$
|
365,252
|
|
|
$
|
252,804
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax
|
|
$
|
3,803
|
|
|
$
|
(16,076)
|
|
|
$
|
5,099
|
|
|
$
|
(12,050)
|
|
Adjustments to discontinued operations net income:
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
—
|
|
|
(3)
|
|
|
—
|
|
|
(64)
|
|
Benefit for income taxes
|
|
(898)
|
|
|
(4,635)
|
|
|
(372)
|
|
|
(3,342)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring, store closure and other charges, net
|
|
915
|
|
|
24,182
|
|
|
933
|
|
|
24,182
|
|
Adjusted EBITDA of discontinued operations
|
|
$
|
3,820
|
|
|
$
|
3,468
|
|
|
$
|
5,660
|
|
|
$
|
8,726
|
|
(1)Fiscal 2020 reflects a goodwill impairment charge attributable to a reorganization of our reporting units and a sustained decrease in market capitalization and enterprise value of the Company, resulting in a decline in the estimated fair value of the U.S. Wholesale reporting unit. In addition, this charge includes a goodwill finalization charge attributable to the Supervalu acquisition and an asset impairment charge.
(2)Fiscal 2021 primarily reflects costs associated with advisory and transformational activities as we position our business for further value-creation post Supervalu acquisition. Fiscal 2020 primarily reflects integration charges, closed property reserve charges and administrative and operational restructuring costs. Refer to Note 4—Restructuring, Acquisition and Integration Related Expenses in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.
(3)Reflects reserves and charges for notes receivable issued by the Supervalu business prior to its acquisition to finance the purchase of stores by its customers.
(4)Reflects a charge to settle a legal proceeding, net of income received to settle a separate legal proceeding.
(5)Reflects expenses associated with event-specific damages to certain retail stores.
(6)We believe the inclusion of discontinued operations results within Adjusted EBITDA provides investors a meaningful measure of total performance.
RESULTS OF OPERATIONS
Net Sales
Our net sales by customer channel was as follows (in millions except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales for the 13-Week Period Ended
|
|
Increase (Decrease)
|
|
Net Sales for the 26-Week Period Ended
|
Increase (Decrease)
|
|
|
Customer Channel(1)
|
|
January 30,
2021
|
|
February 1,
2020
|
|
$
|
|
%
|
|
January 30,
2021
|
|
February 1,
2020
|
|
$
|
|
%
|
|
|
|
|
Chains
|
|
$
|
3,097
|
|
|
$
|
2,909
|
|
|
$
|
188
|
|
|
6
|
%
|
|
$
|
6,117
|
|
|
$
|
5,784
|
|
|
$
|
333
|
|
|
6
|
%
|
|
|
|
|
Independent retailers
|
|
1,701
|
|
|
1,561
|
|
|
140
|
|
|
9
|
%
|
|
3,373
|
|
|
3,118
|
|
|
255
|
|
|
8
|
%
|
|
|
|
|
Supernatural
|
|
1,298
|
|
|
1,211
|
|
|
87
|
|
|
7
|
%
|
|
2,512
|
|
|
2,322
|
|
|
190
|
|
|
8
|
%
|
|
|
|
|
Retail
|
|
621
|
|
|
539
|
|
|
82
|
|
|
15
|
%
|
|
1,216
|
|
|
1,054
|
|
|
162
|
|
|
15
|
%
|
|
|
|
|
Other
|
|
568
|
|
|
566
|
|
|
2
|
|
|
—
|
%
|
|
1,149
|
|
|
1,156
|
|
|
(7)
|
|
|
(1)
|
%
|
|
|
|
|
Eliminations
|
|
(397)
|
|
|
(355)
|
|
|
(42)
|
|
|
12
|
%
|
|
(806)
|
|
|
(706)
|
|
|
(100)
|
|
|
14
|
%
|
|
|
|
|
Total net sales
|
|
$
|
6,888
|
|
|
$
|
6,431
|
|
|
$
|
457
|
|
|
7
|
%
|
|
$
|
13,561
|
|
|
$
|
12,728
|
|
|
$
|
833
|
|
|
7
|
%
|
|
|
|
|
(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 for information regarding the recast of sales by customer channel to align with the current period presentation.
Second Quarter
Our net sales for the second quarter of fiscal 2021 increased approximately 7.1% from the second quarter of fiscal 2020. The increase in net sales was primarily driven by strong customer demand in response to the pandemic as well as the benefits from cross selling, which was partially offset by lower sales from previously lost customers and stores prior to the pandemic.
Chains net sales increased primarily due to growth in sales to existing customers, including demand for center store and natural products driven by customers’ response to the pandemic, partially offset by lower sales from customers and stores lost prior to the pandemic.
Independent retailers net sales increased primarily due to growth in sales to existing customers, including demand for center store and natural products driven by customers response to the pandemic, partially offset by lower sales from previously lost customers and stores prior to the pandemic.
Supernatural net sales increased primarily due to increased sales related to the pandemic, growth in existing and new product categories, and increased sales to existing and new stores, partially offset by the impact of categories that have been adversely impacted by the pandemic, such as bulk and ingredients used for prepared foods. Net sales within our supernatural channel do not include net sales to Amazon.com, Inc. in either the current period or the prior period, as these net sales are reported in our other channel.
Retail’s net sales increased primarily due to a 15.3% increase in identical store sales from higher average basket sizes related to the pandemic. Retail identical store sales are defined as net product sales from stores operating since the beginning of the prior-year period, including store expansions and excluding fuel costs and announced planned store dispositions. Identical store sales is a common metric used to understand the sales performance of retail stores as it removes the impact of new and closed stores. The increase in Retail sales included the benefit of a 187% increase in eCommerce sales at Cub Foods.
Other net sales increased primarily due to higher eCommerce sales, which were primarily offset by a 41% (or $42 million) decline in sales to food service customers resulting from the lower purchases due to the pandemic.
Year-to-Date
Our net sales for fiscal 2021 year-to-date increased approximately 6.5% from fiscal 2020 year-to-date. The increase in net sales was primarily driven by strong customer demand in response to the pandemic as well as the benefits from cross selling, which was partially offset by lower sales from previously lost customers and stores prior to the pandemic.
Chains net sales increased primarily due to growth in sales to existing customers, including demand for center store and natural products driven by customers’ response to the pandemic, partially offset by lower sales from customers and stores lost prior to the pandemic.
Independent retailers net sales increased primarily due to growth in sales to existing customers, including demand for center store and natural products driven by customers response to the pandemic, partially offset by lower sales from previously lost customers and stores prior to the pandemic.
Supernatural net sales increased primarily due to increased sales related to the pandemic, growth in existing and new product categories, and increased sales to existing and new stores, partially offset by the impact of categories that have been adversely impacted by the pandemic, such as bulk and ingredients used for prepared foods.
Retail’s net sales increased primarily due to a 15.5% increase in identical store sales from higher average basket sizes related to the pandemic. The increase in Retail sales included the benefit of a 191% increase in eCommerce sales at Cub Foods.
Other net sales decreased primarily due to a 41% (or $90 million) decline in sales to food service customers resulting from the lower purchases due to the pandemic, which were partially offset by higher eCommerce sales.
Cost of Sales and Gross Profit
Our gross profit increased $73.0 million, or 8.0%, to $990.4 million for the second quarter of fiscal 2021, from $917.3 million for the second quarter of fiscal 2020. Our gross profit as a percentage of net sales increased to 14.38% for the second quarter of fiscal 2021 compared to 14.26% for the second quarter of fiscal 2020. The increase in gross profit dollar growth was primarily driven by higher Wholesale and Retail sales volume. The 12 basis point increase in gross profit rate was driven by an increase from Retail, which contributed approximately 0.13% to the growth in the consolidated gross margin rate as a result of lower Retail promotional spending and the Retail segment representing a greater percentage of total net sales. Wholesale and the remaining business’s gross margin rate was approximately flat and included the benefits of lower shrink offset by lower levels of supplier-related income. Included in gross margin for the second quarter of fiscal 2020 was inventory shrink expense of approximately $4.2 million, or 0.07% of net sales, associated with customer bankruptcies.
Our gross profit increased $132.3 million, or 7.3%, to $1,956.9 million for fiscal 2021 year-to-date, from $1,824.5 million for fiscal 2020 year-to-date. Our gross profit as a percentage of net sales increased to 14.43% for fiscal 2021 year-to-date compared to 14.33% for fiscal 2020 year-to-date. The increase in gross profit dollar growth for fiscal 2021 year-to-date when compared to fiscal 2020 year-to-date was primarily driven by higher Wholesale and Retail sales volume. The increase in gross profit rate was driven by a mix increase from Retail resulting from lower promotional spending, and the Retail segment representing a greater percentage of total net sales. In addition, gross profit included lower levels of supplier-related income, partially offset by the benefits of lower shrink.
Operating Expenses
Operating expenses increased $4.1 million, or 0.5%, to $866.9 million, or 12.59% of net sales, for the second quarter of fiscal 2021 compared to $862.7 million, or 13.41% of net sales, for the second quarter of fiscal 2020. Operating expenses in the second quarter of fiscal 2020 included $28.9 million of bad debt expense associated with customer bankruptcies. The remaining decrease in operating expenses as a percent of net sales resulted from leveraging fixed operating expenses over higher net sales and lower benefit costs. Total operating expenses also included share-based compensation expense of $12.7 million and $5.1 million for the second quarters of fiscal 2021 and 2020, respectively.
Operating expenses increased $21.4 million, or 1.2%, to $1,767.8 million, or 13.04% of net sales, for fiscal 2021 year-to-date compared to $1,746.4 million, or 13.72% of net sales, for fiscal 2020 year-to-date. Operating expenses in fiscal 2020 year-to-date included $28.9 million of bad debt expense associated with customer bankruptcies, and $18.8 million of charges and expenses, primarily related to customer notes receivable, surplus property depreciation and a legal reserve charge. The remaining decrease in operating expenses as a percent of net sales was driven by leveraging fixed operating expenses over higher net sales and lower benefit costs, which was partially offset by higher operating costs related to starting up three distribution centers. Total operating expenses also included share-based compensation expense of $26.8 million and $9.1 million for fiscal 2021 and 2020 year-to-date, respectively.
Goodwill and Asset Impairment Charges
Goodwill and asset impairment charges of $425.4 million were recorded for fiscal 2020 year-to-date, which reflects $421.5 million from an impairment charge on the remaining goodwill attributable to the U.S. Wholesale goodwill reporting unit, $2.5 million related to purchase accounting adjustments to finalize the opening balance sheet goodwill and $1.4 million of other asset impairment charges.
Restructuring, Acquisition and Integration Related Expenses
Restructuring, acquisition and integration related expenses were $17.8 million for the second quarter of fiscal 2021, which included $14.7 million of restructuring and integration costs primarily reflecting costs associated with advisory and transformational activities as we position our business for further value creation post Supervalu acquisition and $3.1 million of closed property charges and costs. Expenses for the second quarter of fiscal 2020 were $36.5 million, which included $20.4 million of closed property charges and costs primarily related to lease asset impairments on Shoppers store and surplus properties exits, $15.4 million of integration related costs primarily related to a multiemployer pension plan withdrawal obligation resulting from distribution center consolidation and $0.7 million of restructuring costs.
Restructuring, acquisition and integration related expenses were $34.2 million for fiscal 2021 year-to-date, which included $29.4 million of restructuring and integration costs primarily reflecting costs associated with advisory and transformational activities as we position our business for further value creation post Supervalu acquisition and $4.8 million of closed property charges and costs. Expenses for fiscal 2020 year-to-date were $51.2 million, which included $24.7 million of integration costs including a multiemployer pension plan withdrawal obligation resulting from distribution center consolidation and a charge for an off-site storage contract, $24.0 million closed property charges and costs primarily related to lease asset impairments on surplus properties and Shoppers store lease exits and $2.5 million of restructuring costs.
We expect to incur additional costs associated with advisory and integration activities, and distribution center integration costs throughout fiscal 2021 related to our operational restructuring to achieve cost synergies and supply chain efficiencies within continuing operations.
Operating Income (Loss)
Reflecting the factors described above, operating income increased $87.8 million to $105.3 million for the second quarter of fiscal 2021, compared to $17.5 million for the second quarter of fiscal 2020. The operating income increase was primarily driven by an increase in gross profit in excess of operating expenses and lower Restructuring, acquisition and integration related expenses discussed above.
Reflecting the factors described above, operating income increased $553.6 million, to $154.6 million for fiscal 2021 year-to-date, from an operating loss of $398.9 million for fiscal 2020 year-to-date. The increase in operating income was primarily driven by the fiscal 2020 goodwill impairment charge, an increase in gross profit in excess of operating expenses and lower Restructuring, acquisition and integration related expenses discussed above.
Total Other Expense, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13-Week Period Ended
|
|
|
26-Week Period Ended
|
(in thousands)
|
|
January 30, 2021
|
|
February 1, 2020
|
|
|
January 30, 2021
|
|
February 1, 2020
|
Net periodic benefit income, excluding service cost
|
|
$
|
(17,127)
|
|
|
$
|
(3,277)
|
|
|
|
$
|
(34,160)
|
|
|
$
|
(14,661)
|
|
Interest expense on long-term debt, net of capitalized interest
|
|
37,793
|
|
|
43,137
|
|
|
|
74,989
|
|
|
86,676
|
|
Interest expense on finance lease obligations
|
|
4,678
|
|
|
2,020
|
|
|
|
9,546
|
|
|
4,263
|
|
Amortization of financing costs and discounts
|
|
3,010
|
|
|
3,790
|
|
|
|
7,009
|
|
|
7,733
|
|
Loss on debt extinguishment
|
|
5,744
|
|
|
—
|
|
|
|
29,494
|
|
|
73
|
|
Interest income
|
|
(281)
|
|
|
(111)
|
|
|
|
(961)
|
|
|
(200)
|
|
Interest expense, net
|
|
50,944
|
|
|
48,836
|
|
|
|
120,077
|
|
|
98,545
|
|
Other, net
|
|
(1,674)
|
|
|
(1,220)
|
|
|
|
(2,472)
|
|
|
(1,620)
|
|
Total other expense, net
|
|
$
|
32,143
|
|
|
$
|
44,339
|
|
|
|
$
|
83,445
|
|
|
$
|
82,264
|
|
The increase in net periodic benefit income, excluding service costs in the second quarter of fiscal 2021 and year-to-date fiscal 2021 reflects the recognition of lower interest costs due to a lower discount rate utilized in the measurement of pension liabilities.
The decrease in interest expense on long-term debt, net of capitalized interest, in the second quarter of fiscal 2021 and year-to-date fiscal 2021 was driven by lower amounts of outstanding debt.
The increase in loss on debt extinguishment costs primarily reflects the acceleration of unamortized debt issuance costs and original issue discounts related to mandatory and voluntary prepayments on the Term Loan Facility made in the second quarter of fiscal 2021 and fiscal 2021 year-to-date. Refer to Note 8—Long-Term Debt for further information.
The increase in interest expense on finance leases in the second quarter of fiscal 2021 and year-to-date fiscal 2021 primarily reflects interest related to a distribution center for which we executed a purchase option with a delayed purchase provision.
Provision (Benefit) for Income Taxes
The effective income tax rate for continuing operations was an expense of 22.4% on pre-tax income compared to a benefit of 47.8% on pre-tax losses for the second quarters of fiscal 2021 and 2020, respectively. The change in the effective income tax rate for the second quarter of fiscal 2021 was primarily driven by a pre-tax loss of approximately $26.8 million in the second quarter of fiscal 2020 compared to pre-tax income of approximately $73.2 million in the second quarter of fiscal 2021. In addition, the change in the rate is partially driven by a discrete tax benefit of approximately $2.8 million in the second quarter of fiscal 2021 related to the release of unrecognized tax positions versus a discrete tax benefit of approximately $0.5 million for this item in the second quarter of fiscal 2020. The tax provision had $3.1 million and $0.1 million of discrete tax benefits, including those mentioned above, for the second quarters of fiscal 2021 and fiscal 2020, respectively.
The effective income tax rate for continuing operations was an expense of 21.6% on pre-tax income compared to a benefit of 16.6% on pre-tax losses for fiscal 2021 year-to-date and fiscal 2020 year-to-date, respectively. The change in the effective income tax rate was primarily driven by a discrete tax benefit in fiscal 2021 year-to-date for employee stock vestings versus a discrete tax expense for this item in fiscal 2020 year-to-date, as well as a discrete tax benefit for the release of unrecognized tax positions in fiscal 2021 year-to-date versus a discrete tax expense for this item in fiscal 2020 year-to-date. In addition, fiscal 2020 year-to-date was impacted by a goodwill impairment charge that did not repeat in fiscal 2021 year-to-date. The tax provision had $3.5 million and $64.4 million of discrete tax benefits for fiscal 2021 and fiscal 2020 year-to-date, respectively.
Income (Loss) from Discontinued Operations, Net of Tax
The results of operations for the second quarter of fiscal 2021 reflect net sales of $23.0 million for which we recognized $7.2 million of gross profit and Income (loss) from discontinued operations, net of tax of $3.8 million. Net sales and gross profit of discontinued operations decreased $52.1 million and $11.3 million, respectively, for the second quarter of fiscal 2021 as compared to the second quarter of fiscal 2020 primarily due to a lower operating store base due to closures and sales that occurred in fiscal 2020, which was partially offset by an increase in identical store sales results driven by the impacts of the pandemic.
The results of operations for fiscal 2021 year-to-date reflect net sales of $47.8 million for which we recognized $15.3 million of gross profit and Income (loss) from discontinued operations, net of tax of $5.1 million. Net sales and gross profit of discontinued operations decreased $122.9 million and $33.8 million, respectively, for the fiscal 2021 year-to-date as compared to fiscal 2020 year-to-date primarily due to a lower operating store base due to closures and sales that occurred in fiscal 2020 year-to-date, which was partially offset by an increase in identical store sales results driven by the impacts of the pandemic. Discontinued operations for fiscal 2020 year-to-date included $24.2 million of charges and costs primarily related to store closures charges and expenses, and asset impairment charges related to exited locations.
Refer to the section above Executive Overview—Divestiture of Retail Operations and to Note 16—Discontinued Operations in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional financial information regarding these discontinued operations.
Net Income (Loss) Attributable to United Natural Foods, Inc.
Reflecting the factors described in more detail above, Net income attributable to United Natural Foods, Inc. was $59.0 million, or $1.00 per diluted common share, for the second quarter of fiscal 2021, compared to a net loss of $30.7 million, or $0.57 loss per diluted common share, for the second quarter of fiscal 2020.
Reflecting the factors described in more detail above, Net income attributable to United Natural Foods, Inc. was $57.9 million, or $0.98 per diluted common share, for fiscal 2021 year-to-date, compared to a net loss of 414.6 million, or $7.77 loss per diluted common share, for fiscal 2020 year-to-date, which was driven lower due to goodwill impairment charges.
As described in more detail in Note 10—Share-Based Awards in Part I, Item I of this Quarterly Report on Form 10-Q, in fiscal 2021 year-to-date, we granted restricted stock units and performance share units representing a right to receive an aggregate of 2.6 million shares of common stock under our 2020 Equity Incentive Plan.
LIQUIDITY AND CAPITAL RESOURCES
Highlights
•Total liquidity as of January 30, 2021 was $1.16 billion and consisted of the following:
◦Unused credit under our ABL Credit Facility was $1,117.8 million, which decreased $117.0 million from $1,234.8 million as of August 1, 2020, primarily due to an incremental borrowing under the ABL Credit Facility in the second quarter of fiscal 2021 to fund the voluntary prepayment of $150.0 million on the Term Loan Facility.
◦Cash and cash equivalents was $40.5 million, which decreased $6.5 million from $47.0 million as of August 1, 2020.
•Our total debt decreased $110.4 million to $2,387.2 million as of January 30, 2021 from $2,497.6 million as of August 1, 2020, primarily driven by net positive cash flows from operating activities, partially offset by cash capital expenditures, during fiscal 2021 year-to-date.
•Subsequent to the end of the second quarter of fiscal 2021, we amended our Term Loan Agreement which, among other things, reduced the applicable margin for LIBOR and base rate loans under the Term Loan Facility by 75 basis points.
•In the second quarter of fiscal 2021, we made a voluntary prepayment of $150.0 million on the Term Loan Facility funded with incremental borrowings under the ABL Credit Facility that will reduce our interest costs. This prepayment will count towards satisfying any requirement to make a mandatory prepayment with Excess Cash Flow (as defined in the Term Loan Agreement) generated during fiscal 2021, if any, which would be due in fiscal 2022.
•In the first quarter of fiscal 2021, we issued $500.0 million of unsecured 6.750% Senior Notes due October 15, 2028 (the “Senior Notes”) and utilized the net proceeds and borrowings under the ABL Credit Facility to make a $500.0 million prepayment on our Term Loan Facility. In addition, during the first quarter of fiscal 2021, the Company made $108.0 million of additional repayments under the Term Loan Facility, including $72.0 million related to cash flow generated in fiscal 2020, as required under the Term Loan Agreement and a voluntary prepayment of $36.0 million with incremental borrowings under the ABL Credit Facility. Other debt maturities are expected to be $6.5 million in fiscal 2021. We are also obligated to make payments to reduce finance lease obligations. 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.
•We expect to be able to fund near-term debt maturities through fiscal 2023 with internally generated funds, proceeds from asset sales or borrowings under the ABL Credit Facility, which expires in fiscal 2024.
•Working capital increased $20.2 million to $1,355.1 million as of January 30, 2021 from $1,334.8 million as of August 1, 2020, primarily due to a reduction of the current portion of long-term debt resulting from the Term Loan Facility Excess Cash Flow prepayment described above.
Sources and Uses of Cash
We expect to continue to replenish operating assets and pay down debt obligations with internally generated funds and sale of surplus and/or non-core assets. 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.
Our primary sources of liquidity are from internally generated funds and from borrowing capacity under our credit facilities. Our short-term and long-term financing abilities are believed to be 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 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.
We currently do not pay a dividend on our common stock, and have no current plans to do so. In addition, we are limited in the aggregate amount of dividends that we may pay under the terms of our Term Loan Facility, ABL Credit Facility, and Senior Notes. 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.
Long-Term Debt
During fiscal 2021 year-to-date, we borrowed a net $128.3 million under the ABL Credit Facility, repaid $758.0 million on the Term Loan Facility related to mandatory prepayments and voluntary prepayments, and issued $500.0 million of Senior Notes. 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. Our ABL Loan Agreement subjects us to a fixed charge coverage ratio (as defined in the ABL Loan Agreement) 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 (as defined in the ABL Loan Agreement) is ever less than the greater of (i) $235.0 million 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 Quarterly Report. The Term Loan Agreement, ABL Loan Agreement and Senior Notes contain certain operational and informational covenants customary for debt securities of these types that limit the ability of the Company and its restricted subsidiaries to, among other things, incur debt, declare or pay dividends or make other distributions to stockholders of the Company, transfer or sell assets, create liens on our assets, engage in transactions with affiliates, and merge, consolidate or sell all or substantially all of the assets of the Company and its subsidiaries 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 loan agreement, and all amounts due thereunder may become immediately due and payable.
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 overall 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.
As of January 30, 2021, we had an aggregate of $1,485.0 million of floating rate notional debt subject to active interest rate swap contracts, which effectively hedge the LIBOR component of our interest rate payments through pay fixed and receive floating interest rate swap agreements. These fixed rates range from 1.795% to 2.959%, with maturities between April 2022 and October 2025. The fair value of these interest rate derivatives represents a total net liability of $101.2 million and are subject to volatility based on changes in market interest rates. See Note 7—Derivatives in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.
In the first quarter of fiscal 2021, we paid $11.3 million to terminate $954.0 million of notional value interest rate swaps, $504.0 million of which were effective interest swaps and $450.0 million of which were forward starting. The termination payment reflects the amount of accumulated other comprehensive loss that will continue to be amortized into interest expense over the original interest rate swap contract terms as long as the hedged interest rate transactions are still probable of occurring.
From time to time, we enter into fixed price fuel supply agreements and foreign currency hedges. As of January 30, 2021, we had fixed price fuel contracts outstanding and foreign currency forward agreements outstanding. Gains and losses and the outstanding net liability from these arrangements are insignificant.
Capital Expenditures
Our capital expenditures for fiscal 2021 year-to-date were $91.5 million, compared to $91.1 million for fiscal 2020 year-to-date, an increase of $0.4 million. In fiscal 2021 year-to-date, our capital expenditures principally included information technology and supply chain expenditures. Fiscal 2021 capital spending is expected to be in the range of $250 million to $300 million and include projects that optimize and expand our distribution network and our technology platform. Longer term, capital spending is expected to be at or below 1.0% of net sales. We expect to finance 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.
Cash Flow Information
The following summarizes our Condensed Consolidated Statements of Cash Flows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26-Week Period Ended
|
(in thousands)
|
January 30, 2021
|
|
February 1, 2020
|
|
Change
|
Net cash provided by operating activities of continuing operations
|
$
|
205,675
|
|
|
$
|
34,730
|
|
|
$
|
170,945
|
|
Net cash used in investing activities of continuing operations
|
(51,705)
|
|
|
(80,270)
|
|
|
28,565
|
|
Net cash (used in) provided by financing activities of continuing operations
|
(163,492)
|
|
|
15,649
|
|
|
(179,141)
|
|
Net cash provided by discontinued operations
|
2,791
|
|
|
26,937
|
|
|
(24,146)
|
|
Effect of exchange rate on cash
|
265
|
|
|
19
|
|
|
246
|
|
Net decrease in cash and cash equivalents
|
(6,466)
|
|
|
(2,935)
|
|
|
(3,531)
|
|
Cash and cash equivalents, at beginning of period
|
47,117
|
|
|
45,263
|
|
|
1,854
|
|
Cash and cash equivalents, at end of period
|
$
|
40,651
|
|
|
$
|
42,328
|
|
|
$
|
(1,677)
|
|
The increase in net cash provided by operating activities of continuing operations for fiscal 2021 year-to-date compared to fiscal 2020 year-to-date was primarily due to lower cash utilized to build inventories, and higher earnings before taxes, depreciation and amortization, and impairments.
The decrease in net cash used in investing activities of continuing operations for fiscal 2021 year-to-date compared to fiscal 2020 year-to-date was primarily due to higher cash proceeds for the sale of property and equipment.
The increase in net cash used in financing activities of continuing operations for fiscal 2021 year-to-date compared to fiscal 2020 year-to-date was primarily due to higher payments of long-term debt attributable to the mandatory and voluntary prepayments on the Term Loan Facility, partially offset by new borrowings from the Senior Notes.
The decrease in cash flows from discontinued operations for fiscal 2021 year-to-date compared to fiscal 2020 year-to-date was primarily due to lower investing activities cash flow from the sale of property.
Other
On October 6, 2017, we announced that our Board of Directors authorized a share repurchase program for up to $200.0 million of our outstanding common stock. The repurchase program is scheduled to expire upon our repurchase of shares of our common stock having an aggregate purchase price of $200.0 million. We did not purchase any shares of our common stock in fiscal 2021 and 2020 year-to-date pursuant to the share repurchase program. As of January 30, 2021, we have $175.8 million remaining authorized under the share repurchase program. We do not expect to purchase shares under the share repurchase program during fiscal 2021. Additionally, our ABL Credit Facility, Term Loan Facility, and Senior Notes contain terms that limit our ability to repurchase shares of common stock above certain levels unless certain conditions and financial tests are met.
Pension and Other Postretirement Benefit Obligations
In fiscal 2021, no pension contributions are required to be made under either the SUPERVALU Inc. Retirement Plan or the Unified Grocers, Inc. Cash Balance Plan under Employee Retirement Income Security Act of 1974, as amended (“ERISA”). We anticipate fiscal 2021 non-qualified pension contributions and other postretirement benefit plan contributions to be approximately $5.3 million. We fund our defined benefit pension plans based on the minimum contribution amount required under ERISA, the Pension Protection Act of 2006 and other applicable laws, as determined by us, including our external actuarial consultant, 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.
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 14—Business Segments within Part I, Item 1 of this Quarterly Report on Form 10-Q 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.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13-Week Period Ended
|
|
|
|
26-Week Period Ended
|
|
|
(in thousands)
|
|
January 30, 2021
|
|
February 1, 2020
|
|
Change
|
|
January 30, 2021
|
|
February 1, 2020
|
|
Change
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
6,608,775
|
|
|
$
|
6,206,918
|
|
|
$
|
401,857
|
|
|
$
|
13,040,058
|
|
|
$
|
12,274,225
|
|
|
$
|
765,833
|
|
Retail
|
|
620,871
|
|
|
538,629
|
|
|
82,242
|
|
|
1,215,782
|
|
|
1,053,855
|
|
|
161,927
|
|
Other
|
|
55,428
|
|
|
41,073
|
|
|
14,355
|
|
|
111,040
|
|
|
106,152
|
|
|
4,888
|
|
Eliminations
|
|
(396,941)
|
|
|
(355,238)
|
|
|
(41,703)
|
|
|
(806,140)
|
|
|
(706,238)
|
|
|
(99,902)
|
|
Total Net sales
|
|
$
|
6,888,133
|
|
|
$
|
6,431,382
|
|
|
$
|
456,751
|
|
|
$
|
13,560,740
|
|
|
$
|
12,727,994
|
|
|
$
|
832,746
|
|
Continuing operations Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
|
$
|
186,768
|
|
|
$
|
102,454
|
|
|
$
|
84,314
|
|
|
$
|
309,729
|
|
|
$
|
208,766
|
|
|
$
|
100,963
|
|
Retail
|
|
25,330
|
|
|
11,428
|
|
|
13,902
|
|
|
49,612
|
|
|
21,990
|
|
|
27,622
|
|
Other
|
|
(7,845)
|
|
|
14,425
|
|
|
(22,270)
|
|
|
(3,695)
|
|
|
12,828
|
|
|
(16,523)
|
|
Eliminations
|
|
(1,778)
|
|
|
(665)
|
|
|
(1,113)
|
|
|
3,946
|
|
|
494
|
|
|
3,452
|
|
Total continuing operations Adjusted EBITDA
|
|
$
|
202,475
|
|
|
$
|
127,642
|
|
|
$
|
74,833
|
|
|
$
|
359,592
|
|
|
$
|
244,078
|
|
|
$
|
115,514
|
|
Net Sales
Second Quarter
Wholesale’s net sales increased primarily due to growth in sales to existing customers in the Chains, Independent retailers and Supernatural channels. Sales growth was primarily driven by strong customer demand in response to the pandemic as well as the benefits from cross selling, which was partially offset by lower sales from previously lost customers and stores prior to the pandemic.
Retail’s net sales increased primarily due to a 15.3% increase in identical store sales from higher average basket sizes related to the pandemic.
The increase in eliminations net sales was driven by higher Wholesale sales to Retail to support Retail’s continued sales growth.
Year-to-Date
Wholesale’s net sales increased primarily due to growth in sales to existing customers in the Chains, Independent retailers and Supernatural channels. Sales growth was primarily driven by strong customer demand in response to the pandemic as well as the benefits from cross selling, which was partially offset by lower sales from previously lost customers and stores prior to the pandemic.
Retail’s net sales increased primarily due to a 15.5% increase in identical store sales from higher average basket sizes related to the pandemic.
The increase in eliminations net sales was driven by higher Wholesale sales to Retail to support Retail’s continued sales growth.
Adjusted EBITDA
Second Quarter
Wholesale’s Adjusted EBITDA increased 82.3% for the second quarter of fiscal 2021 from the second quarter of fiscal 2020. The increase was driven by leveraged sales growth. Wholesale’s gross profit dollar growth for the second quarter of fiscal 2021 was $49.5 million and gross profit rate was flat to the second quarter of fiscal 2020; however, it included the benefits of lower shrink offset by lower levels of supplier-related income. Wholesale’s operating expense, excluding depreciation and amortization and stock-based compensation, decreased $34.8 million driven by $28.9 million of lower bad debt expense associated with customer bankruptcies. Wholesale’s operating expense rate decreased 117 basis points primarily driven by leveraging fixed and variable costs, and lower bad debt expense. Wholesale depreciation expense decreased $7.0 million compared to last year.
Retail’s Adjusted EBITDA increased 121.6% for the second quarter of fiscal 2021 from the second quarter of fiscal 2020. The increase was driven by leveraged sales growth from increases in food-at-home purchases that drove sales at our stores. Wholesale’s gross profit dollar growth for the second quarter of fiscal 2021 was $26.3 million and gross profit rate increased 76 basis points from lower promotional activity. Retail’s operating expense increased $11.4 million, excluding depreciation and amortization and stock-based compensation, and operating expense rate decreased 133 basis points driven by fixed and variable cost leveraging. Retail’s depreciation and amortization expense increased $5.9 million primarily related to assets previously classified as held for sale that were moved to continuing operations in the fourth quarter of fiscal 2020 for which we are required to begin recording depreciation and amortization expense.
Year-To-Date
Wholesale’s Adjusted EBITDA increased 48.4% for fiscal 2021 year-to-date from fiscal 2020 year-to-date. The increase was driven by leveraged sales growth, which was partially offset by higher operating costs related to starting up three distribution centers. Gross profit dollar growth for fiscal 2021 year-to-date was $77.8 million and gross profit rate decreased 13 basis points driven by lower supplier income, partially offset by lower shrink. Wholesale’s operating expense increased $23.2 million, excluding depreciation and amortization and stock-based compensation. Wholesale’s operating expense rate decreased 80 basis points primarily driven by leveraging fixed and variable costs, and lower bad debt expense, which was partially offset by higher operating costs related to starting up three distribution centers. Wholesale depreciation expense decreased $7.2 million.
Retail’s Adjusted EBITDA increased 125.6% for fiscal 2021 year-to-date from fiscal 2020 year-to-date. The increase was driven by leveraged sales growth from increases in food-at-home purchases that drove sales at our stores. Gross profit dollar growth for fiscal 2021 year-to-date was $53.4 million and gross profit rate increased 87 basis points from lower promotional activity. Retail’s operating expense increased $23.9 million, excluding depreciation and amortization and stock-based compensation, and operating expense rate decreased 125 basis points driven by fixed and variable cost leveraging. Retail’s depreciation and amortization expense increased $11.9 million primarily related to assets previously classified as held for sale that were moved to continuing operations in the fourth quarter of fiscal 2020 for which we are required to begin recording depreciation and amortization expense.
COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS
Off-Balance Sheet Arrangements
Guarantees and Contingent Liabilities
We have outstanding guarantees related to certain leases, fixture financing loans and other debt obligations of various retailers as of January 30, 2021. We are contingently liable for leases that have been assigned to various parties in connection with facility closings and dispositions. We are also a party to a variety of contractual agreements under which we may be obligated to indemnify the other party for certain matters in the ordinary course of business, which indemnities may be secured by operation of law or otherwise. Refer to Note 15—Commitments, Contingencies and Off-Balance Sheet Arrangements under the caption Guarantees and Contingent Liabilities in Part I, Item I of this Quarterly Report on Form 10-Q for further information regarding our outstanding guarantees and contingent liabilities.
Multiemployer Benefit Plans
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 collective bargaining agreement. 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 would require us to record a withdrawal liability. Expense is recognized in connection with these plans as contributions are funded, in accordance with GAAP. We made contributions to these plans, and recognized continuing and discontinued operations expense, of $52 million in fiscal 2020. In fiscal 2021, we expect to contribute approximately $45 million related to continuing and discontinued operations contributions to the multiemployer pension plans, subject to the outcome of collective bargaining and capital market conditions. Any 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.
Refer to Note 14—Benefit Plans in Part II, Item 8 of the Annual Report on Form 10-K for the fiscal year ended August 1, 2020 for additional information regarding the plans in which we participate.
Contractual Obligations
Except as otherwise disclosed in Note 8—Long-Term Debt in Part I, Item 1 of this Quarterly Report on Form 10-Q, there have been no material changes in the Company’s contractual obligations since the end of fiscal 2020. Refer to Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended August 1, 2020 for additional information regarding the Company’s contractual obligations.
Critical Accounting Policies and Estimates
There were no material changes to our critical accounting policies during the period covered by this Quarterly Report on Form 10-Q. Refer to the description of critical accounting policies included in Item 7 of our Annual Report on Form 10-K for the fiscal year ended August 1, 2020.
Seasonality
Generally, we do not experience any material seasonality. However, our inventory levels and related demand for certain products of a seasonal nature may be influenced by holidays, changes in seasons or other annual events. In addition, our sales and operating results may vary significantly from quarter to quarter due to factors such as changes in our operating expenses, management’s ability to execute our operating and growth strategies, demand for our products, supply shortages and general economic conditions.