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. 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;
•our ability to operate, and rely on third parties to operate, reliable and secure technology systems;
•our ability to realize anticipated benefits of our strategic initiatives, including any acquisitions;
•labor and other workforce shortages and challenges;
•the addition or loss of significant customers or material changes to our relationships with these customers;
•our sensitivity to general economic conditions including inflation, changes in disposable income levels and consumer spending trends;
•the impact and duration of any pandemics or disease outbreaks;
•our ability to continue to grow sales, including of our higher margin natural and organic foods and non-food products, and to manage that growth;
•increased competition in our industry, including as a result of continuing consolidation of retailers and the growth of chains, direct distribution by large retailers and the growth of online distributors;
•our ability to timely and successfully deploy our warehouse management system throughout our distribution centers and our transportation management system across the Company and to achieve efficiencies and cost savings from these efforts;
•the potential for disruptions in our supply chain or our distribution capabilities from circumstances beyond our control, including due to lack of long-term contracts, severe weather, labor shortage or work stoppages or otherwise;
•moderated supplier promotional activity, including decreased forward buying opportunities;
•union-organizing activities that could cause labor relations difficulties and increased costs;
•the potential for additional asset impairment charges;
•our ability to maintain food quality and safety;
•volatility in fuel costs;
•volatility in foreign exchange rates; 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 July 30, 2022 (the “Annual Report”) as well as any other cautionary language in this Quarterly Report, as the occurrence of any of these events could have an adverse effect, which may be material, on our business, results of operations, financial condition or cash flows.
EXECUTIVE OVERVIEW
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and notes thereto contained in this Quarterly Report on Form 10-Q, the information contained under the caption “Forward-Looking Statements,” and the information in the Annual Report.
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. We offer approximately 260,000 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 foodservice products; and personal care items. We believe we are North America’s premier wholesaler with 56 distribution centers and warehouses representing approximately 30 million square feet of warehouse space. 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 executing our transformation strategy, which we believe will position us for long-term profitable growth. Our enterprise-wide business transformation program consists of four areas: network automation and optimization; commercial value creation; digital offering enhancement and infrastructure unification and modernization. These four areas represent the next evolution of our business strategy. To enable this business transformation, we have engaged consultants and brought in new leadership with transformation experience to upgrade and modernize our technology and platforms to better serve our customers.
We expect to continue to use available capital to re-invest in our business and to reduce outstanding debt, and we remain committed to improving our financial leverage over time. The decline in our financial leverage in recent years offers us increased flexibility to invest in growing our business and selectively return cash to shareholders as appropriate.
We believe we can accelerate our growth through our transformation efforts, which we expect will increase sales of products and services, and provide tailored, data-driven solutions to help our customers run their businesses more efficiently and contribute to customer acquisitions. We believe the key drivers for new customer growth will be the benefits of our significant scale, product and service offerings and nationwide footprint.
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.
The U.S. economy has experienced economic volatility in recent years due to uncertain economic conditions, which have had, and we expect may continue to have, an impact on consumer confidence. Consumer spending may be impacted by levels of discretionary income and consumers trading down to a less expensive mix of products for grocery items. In addition, inflation remains at elevated levels and continues to be unpredictable. For example, we experienced volatility in our energy operating costs, and commodity and labor input costs continue to impact the prices of products we procure from manufacturers. We believe our product mix, which ranges from high-quality natural and organic products to national and local conventional brands, including cost conscious private label brands, positions us to serve a broad cross section of North American retailers and end customers, and may lessen the impact of any shifts in consumer and industry trends in grocery product mix.
Uncertainty remains regarding the longer-term impact of the COVID-19 pandemic on our business as global economies, markets and supply chains respond to the ongoing effects. We continue to monitor guidelines released by the Centers for Disease Control and Prevention and the World Health Organization and, when appropriate, implement mitigation measures to protect our associates, including safety protocols and strongly encouraging vaccinations/boosters. Our results could be impacted by, among other factors, any resurgence of infection rates and new variants of COVID-19 with higher transmissibility, the availability and efficacy of vaccines and treatments, actions taken by governmental authorities and other third parties in response to the pandemic such as health and safety orders and mandates, companies’ remote work policies, any economic downturn, the impact on capital and financial markets, food-at-home purchasing levels and other consumer trends, each of which is uncertain. Any of these disruptions could adversely impact our business and results of operations.
We are also impacted by changes in food distribution trends affecting our Wholesale customers, such as direct store deliveries and other methods of distribution. Our Wholesale customers manage their businesses independently and operate in a competitive environment.
Wholesale Distribution Center Network
We evaluate our distribution center network to optimize performance and expect to incur incremental expenses related to any future network realignment, expansion or improvements, including initiatives under the network automation and optimization pillar of our transformation agenda. We are working to both minimize these potential future costs and obtain new business to further improve the efficiency of our transforming distribution network.
In fiscal 2022, our Allentown, Pennsylvania distribution center began operations, with a capacity of 1.3 million square feet to service customers in the surrounding geographic area. We incurred start-up costs and operating losses, as the volume in this facility continues to ramp up to its operating capacity.
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 23 “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 Inflation
We experienced a mix of inflation across product categories during the second quarter of fiscal 2023. In the aggregate across our businesses, including the mix of products, management estimates our businesses experienced product cost inflation of approximately ten percent in the second quarter of fiscal 2023, as compared to the second quarter of fiscal 2022. Cost inflation 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 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 has the effect of decreasing Gross profit and the carrying value of inventory during periods of inflation.
Our pricing to our customers is determined at the time of sale primarily based on the then prevailing vendor listed base cost, and includes discounts we offer to our customers. Generally, in an inflationary environment as a wholesaler, rising vendor costs result in higher Net sales driven by higher vendor prices when other variables such as quantities sold and vendor promotions are constant. In the second quarter of fiscal 2023, we experienced a sequential deceleration in the number and magnitude of vendor product cost increases as compared to the first quarter of fiscal 2023, which negatively impacted our gross profit rate.
Composition of Condensed 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, and support services revenue from 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 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, facility closure asset impairment charges and costs, share-based compensation acceleration charges and acquisition and integration related expenses. Integration related expenses include certain professional consulting expenses and incremental expenses related to combining facilities required to optimize our distribution network as a result of acquisitions.
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 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 items that do not reflect management’s assessment of ongoing business performance.
We believe Adjusted EBITDA is useful to investors and financial institutions 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 Quarterly Report on Form 10-Q.
There are significant limitations to using Adjusted EBITDA as a financial measure including, but not limited to, it not reflecting the cost of cash expenditures for capital assets or certain other contractual commitments, finance lease obligation and debt service expenses, income taxes and any impacts from changes in working capital.
We define Adjusted EBITDA as a consolidated measure which we reconcile by adding Net income (loss) including noncontrolling interests, less Net income attributable to noncontrolling interests, plus non-operating income and expenses, including Net periodic benefit income, excluding service cost, Interest expense, net and Other (income) expense, net, plus Provision (benefit) for income taxes and Depreciation and amortization all calculated in accordance with GAAP, plus adjustments for Share-based compensation, non-cash LIFO charge or benefit, Restructuring, acquisition and integration related expenses, Goodwill impairment charges, (Gain) loss on sale of assets, certain legal charges and gains, and certain other non-cash charges or other items, as determined by management.
During fiscal 2022, we revised our definition of Adjusted EBITDA to exclude the impact of the non-cash LIFO charge or benefit. We believe that this change provides a better indicator of our underlying operating performance and permits better comparability between periods. Refer to footnote one in the table below and Note 13—Business Segments in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information regarding the impact of the change in definition of Adjusted EBITDA.
Assessment of Our Business Results
The following table sets forth a summary of our results of operations and Adjusted EBITDA for the periods indicated. We have revised the following tables for the change in segment profit measurement for Adjusted EBITDA as discussed in Note 13—Business Segments within Part I, Item 1 of this Quarterly Report on Form 10-Q.
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| 13-Week Period Ended | | | | 26-Week Period Ended | | |
(in millions) | January 28, 2023 | | January 29, 2022 | | Change | | January 28, 2023 | | January 29, 2022 | | Change |
Net sales | $ | 7,816 | | | $ | 7,416 | | | $ | 400 | | | $ | 15,348 | | | $ | 14,413 | | | $ | 935 | |
Cost of sales | 6,747 | | | 6,341 | | | 406 | | | 13,183 | | | 12,296 | | | 887 | |
Gross profit | 1,069 | | | 1,075 | | | (6) | | | 2,165 | | | 2,117 | | | 48 | |
Operating expenses | 1,002 | | | 944 | | | 58 | | | 2,002 | | | 1,876 | | | 126 | |
Restructuring, acquisition and integration related expenses | 3 | | | 5 | | | (2) | | | 5 | | | 8 | | | (3) | |
Loss (gain) on sale of assets | 1 | | | 1 | | | — | | | (4) | | | 1 | | | (5) | |
Operating income | 63 | | | 125 | | | (62) | | | 162 | | | 232 | | | (70) | |
Net periodic benefit income, excluding service cost | (7) | | | (10) | | | 3 | | | (14) | | | (20) | | | 6 | |
Interest expense, net | 39 | | | 44 | | | (5) | | | 74 | | | 84 | | | (10) | |
Other income, net | — | | | (2) | | | 2 | | | (1) | | | (1) | | | — | |
Income before income taxes | 31 | | | 93 | | | (62) | | | 103 | | | 169 | | | (66) | |
Provision for income taxes | 9 | | | 25 | | | (16) | | | 14 | | | 24 | | | (10) | |
Net income including noncontrolling interests | 22 | | | 68 | | | (46) | | | 89 | | | 145 | | | (56) | |
Less net income attributable to noncontrolling interests | (3) | | | (2) | | | (1) | | | (4) | | | (3) | | | (1) | |
Net income attributable to United Natural Foods, Inc. | $ | 19 | | | $ | 66 | | | $ | (47) | | | $ | 85 | | | $ | 142 | | | $ | (57) | |
| | | | | | | | | | | |
Adjusted EBITDA | $ | 181 | | | $ | 220 | | | $ | (39) | | | $ | 388 | | | $ | 420 | | | $ | (32) | |
The following table reconciles Net income including noncontrolling interests to Adjusted EBITDA:
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| 13-Week Period Ended | | 26-Week Period Ended |
(in millions) | January 28, 2023 | | January 29, 2022 | | January 28, 2023 | | January 29, 2022 |
Net income including noncontrolling interests | $ | 22 | | | $ | 68 | | | $ | 89 | | | $ | 145 | |
Adjustments to net income including noncontrolling interests: | | | | | | | |
Less net income attributable to noncontrolling interests | (3) | | | (2) | | | (4) | | | (3) | |
Net periodic benefit income, excluding service cost | (7) | | | (10) | | | (14) | | | (20) | |
Interest expense, net | 39 | | | 44 | | | 74 | | | 84 | |
Other income, net | — | | | (2) | | | (1) | | | (1) | |
Provision for income taxes | 9 | | | 25 | | | 14 | | | 24 | |
Depreciation and amortization | 73 | | | 69 | | | 147 | | | 138 | |
Share-based compensation | 11 | | | 12 | | | 23 | | | 23 | |
LIFO charge(1) | 29 | | | 19 | | | 50 | | | 30 | |
Restructuring, acquisition and integration related expenses | 3 | | | 5 | | | 5 | | | 8 | |
Loss (gain) on sale of assets | 1 | | | 1 | | | (4) | | | 1 | |
Multiemployer pension plan withdrawal benefit(2) | — | | | (8) | | | — | | | (8) | |
Other retail benefit(3) | — | | | (1) | | | — | | | (1) | |
Business transformation costs(4) | 4 | | | — | | | 9 | | | — | |
Adjusted EBITDA | $ | 181 | | | $ | 220 | | | $ | 388 | | | $ | 420 | |
(1)During fiscal 2022, the Company revised its definition of Adjusted EBITDA to exclude the impact of the non-cash LIFO charge or benefit. The following illustrates the impact of the revised definition on previously reported periods to show the effect of this change:
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| | 13-Week Period Ended | | 26-Week Period Ended |
(in millions) | | January 29, 2022 | | January 29, 2022 |
Adjusted EBITDA (previously reported definition) | | $ | 201 | | | $ | 390 | |
LIFO charge | | 19 | | | 30 | |
Adjusted EBITDA (current definition) | | $ | 220 | | | $ | 420 | |
(2)Reflects an adjustment to multiemployer pension plan withdrawal charge estimates.
(3)Reflects an insurance recovery associated with event-specific damages to certain retail stores and store closure costs.
(4)Reflects third-party professional consulting costs for business transformation initiatives, including network automation and optimization, commercial value creation, digital offering enhancement and infrastructure unification and modernization.
RESULTS OF OPERATIONS
Net Sales
Our Net sales by customer channel was as follows (in millions except percentages):
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| | 13-Week Period Ended | | Increase (Decrease) | | 26-Week Period Ended | | Increase (Decrease) | | |
Customer Channel(1) | | January 28, 2023 | | January 29, 2022 | | $ | | % | | January 28, 2023 | | January 29, 2022 | | $ | | % | | | | |
Chains | | $ | 3,322 | | | $ | 3,243 | | | $ | 79 | | | 2.4 | % | | $ | 6,546 | | | $ | 6,325 | | | $ | 221 | | | 3.5 | % | | | | |
Independent retailers | | 1,980 | | | 1,905 | | | 75 | | | 3.9 | % | | 3,927 | | | 3,655 | | | 272 | | | 7.4 | % | | | | |
Supernatural | | 1,659 | | | 1,453 | | | 206 | | | 14.2 | % | | 3,172 | | | 2,831 | | | 341 | | | 12.0 | % | | | | |
Retail | | 660 | | | 643 | | | 17 | | | 2.6 | % | | 1,273 | | | 1,245 | | | 28 | | | 2.2 | % | | | | |
Other | | 609 | | | 581 | | | 28 | | | 4.8 | % | | 1,244 | | | 1,161 | | | 83 | | | 7.1 | % | | | | |
Eliminations | | (414) | | | (409) | | | (5) | | | 1.2 | % | | (814) | | | (804) | | | (10) | | | 1.2 | % | | | | |
Total net sales | | $ | 7,816 | | | $ | 7,416 | | | $ | 400 | | | 5.4 | % | | $ | 15,348 | | | $ | 14,413 | | | $ | 935 | | | 6.5 | % | | | | |
(1)Refer to Note 3—Revenue Recognition in Part 1, Item 1 of this Quarterly Report on Form 10-Q for our channel definitions and additional information.
Second Quarter
Our Net sales for the second quarter of fiscal 2023 increased approximately 5.4% from the second quarter of fiscal 2022. The increase in Net sales was primarily driven by inflation and new business. This new business resulted from selling new or expanded categories to existing customers and adding new customers. These increases were partially offset by a decrease in units sold.
Chains and Independent retailers Net sales increased primarily due to growth in sales to existing and new customers, including an increase from higher product costs, which drove higher wholesale selling prices to our customers, partially offset by a decrease in units sold.
Supernatural Net sales increased primarily due to growth in existing store sales, including the supply of new fresh categories, inflation, and increased sales to new stores, partially offset by a decrease in units sold.
Retail Net sales increased primarily due to a 0.9% increase in identical store sales from higher average basket sizes driven by inflation, offset by lower volume.
Other Net sales increased primarily due to higher eCommerce sales.
Year-to-Date
Our Net sales for fiscal 2023 year-to-date increased approximately 6.5% from fiscal 2022 year-to-date. The increase in Net sales was primarily driven by inflation and new business. This new business resulted from selling new or expanded categories to existing customers and adding new customers. These increases were partially offset by a decrease in units sold.
Chains Net sales increased primarily due to growth in sales to existing and new customers, including an increase from higher product costs, which drove higher wholesale selling prices to our customers, partially offset by a decrease in units sold.
Independent retailers Net sales increased primarily due to increased sales under a supply agreement with a new customer within the Atlantic region commencing in the first quarter of fiscal 2022 and growth in sales to existing customers, including an increase from higher product costs, which drove higher wholesale selling prices to our customers, partially offset by a decrease in units sold.
Supernatural Net sales increased primarily due to growth in existing store sales, including the supply of new fresh categories, inflation, and increased sales to new stores, partially offset by a decrease in units sold.
Retail Net sales increased primarily due to a 1.4% increase in identical store sales from higher average basket sizes driven by inflation, offset by lower volume.
Other Net sales increased primarily due to higher eCommerce sales.
Cost of Sales and Gross Profit
Our gross profit decreased $6 million, or 0.6%, to $1,069 million for the second quarter of fiscal 2023, from $1,075 million for the second quarter of fiscal 2022. Our gross profit as a percentage of Net sales decreased to 13.7% for the second quarter of fiscal 2023 compared to 14.5% for the second quarter of fiscal 2022. The LIFO charge was $29 million and $19 million in the second quarter of fiscal 2023 and 2022, respectively. Excluding the non-cash LIFO charge, gross profit rate was 14.0% of Net sales and 14.8% of Net sales for the second quarter of fiscal 2023 and 2022, respectively. The decrease in gross profit rate, excluding the LIFO charge, was primarily driven by lower current period procurement gains due to the decelerating rate of inflation and lower inventory gains.
Our gross profit increased $48 million, or 2.3% to $2,165 million for fiscal 2023 year-to-date, from $2,117 million for fiscal 2022 year-to-date. Our gross profit as a percentage of Net sales decreased to 14.1% for fiscal 2023 year-to-date compared to 14.7% for fiscal 2022 year-to-date. The LIFO charge was $50 million and $30 million for fiscal 2023 and fiscal 2022 year-to-date, respectively. Excluding the non-cash LIFO charge, gross profit rate was 14.4% of Net sales and 14.9% of Net sales for fiscal 2023 and fiscal 2022 year-to-date, respectively. The decrease in gross profit rate, excluding LIFO charge, was primarily driven by lower current period procurement gains due to the decelerating rate of inflation, lower inventory gains and customer mix.
Operating Expenses
Operating expenses increased $58 million, or 6.1%, to $1,002 million, or 12.8% of Net sales, for the second quarter of fiscal 2023 compared to $944 million, or 12.7% of Net sales, for the second quarter of fiscal 2022. Operating expenses as a percent of Net sales was approximately flat compared to the second quarter of fiscal 2022, after excluding an $8 million benefit related to an adjustment to a previous multiemployer pension plan withdrawal charge estimate in the second quarter of fiscal 2022.
Operating expenses increased $126 million, or 6.7%, to $2,002 million, or 13.0% of Net sales, for fiscal 2023 year-to-date compared to $1,876 million, or 13.0% of Net sales, for fiscal 2022 year-to-date. Operating expenses as a percent of Net sales was approximately flat to the second quarter fiscal 2022 year-to-date; however, Operating expenses included higher occupancy costs in fiscal 2023 year-to-date, which were offset by leveraging fixed expenses across higher sales.
Operating Income
Reflecting the factors described above, Operating income decreased $62 million to $63 million for the second quarter of fiscal 2023, compared to $125 million for the second quarter of fiscal 2022. The decrease in operating income was primarily driven by a decrease in gross profit and an increase in operating expenses as described above.
Reflecting the factors described above, Operating income decreased $70 million, to $162 million for fiscal 2023 year-to-date, compared to $232 million for fiscal 2022 year-to-date. The decrease in operating income was primarily driven by an increase in operating expenses in excess of an increase in gross profit as described above.
Interest Expense, Net
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| | 13-Week Period Ended | | | 26-Week Period Ended |
(in millions) | | January 28, 2023 | | January 29, 2022 | | | January 28, 2023 | | January 29, 2022 |
Interest expense on long-term debt, net of capitalized interest | | $ | 33 | | | $ | 30 | | | | $ | 65 | | | $ | 63 | |
Interest expense on finance lease obligations | | — | | | 5 | | | | 1 | | | 9 | |
Amortization of financing costs and discounts | | 3 | | | 3 | | | | 5 | | | 6 | |
Loss on debt extinguishment | | 3 | | | 6 | | | | 3 | | | 6 | |
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Interest expense, net | | $ | 39 | | | $ | 44 | | | | $ | 74 | | | $ | 84 | |
The decrease in interest expense, net, in the second quarter of fiscal 2023 compared to the second quarter of fiscal 2022 and in fiscal 2023 year-to-date compared to 2022 year-to-date was primarily driven by lower outstanding debt balances and finance leases, partially offset by higher average interest rates.
Provision for Income Taxes
The effective tax rate for the second quarter of fiscal 2023 was 29.0% compared to 26.9% for the second quarter of fiscal 2022. The change was driven primarily by the reduction in pre-tax income during the second quarter of fiscal 2023.
The effective tax rate for fiscal 2023 year-to-date was 13.6% compared to 14.2% for fiscal 2022 year-to-date. The effective tax rate for both fiscal 2023 and fiscal 2022 year-to-date was reduced by the impact of discrete tax benefits related to the vesting of employee stock awards.
Net Income Attributable to United Natural Foods, Inc.
Reflecting the factors described in more detail above, Net income attributable to United Natural Foods, Inc. was $19 million, or $0.31 per diluted common share, for the second quarter of fiscal 2023, compared to $66 million, or $1.08 per diluted common share, for the second quarter of fiscal 2022.
Reflecting the factors described in more detail above, Net income attributable to United Natural Foods, Inc. was $85 million, or $1.38 per diluted common share, for fiscal 2023 year-to-date, compared to $142 million, or $2.33 per diluted common share, for fiscal 2022 year-to-date.
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 13—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 millions) | | January 28, 2023 | | January 29, 2022 | | Change | | January 28, 2023 | | January 29, 2022 | | Change |
Net sales: | | | | | | | | | | | | |
Wholesale | | $ | 7,514 | | | $ | 7,132 | | | $ | 382 | | | $ | 14,773 | | | $ | 13,866 | | | $ | 907 | |
Retail | | 660 | | | 643 | | | 17 | | | 1,273 | | | 1,245 | | | 28 | |
Other | | 56 | | | 50 | | | 6 | | | 116 | | | 106 | | | 10 | |
Eliminations | | (414) | | | (409) | | | (5) | | | (814) | | | (804) | | | (10) | |
Total Net sales | | $ | 7,816 | | | $ | 7,416 | | | $ | 400 | | | $ | 15,348 | | | $ | 14,413 | | | $ | 935 | |
Adjusted EBITDA: | | | | | | | | | | | | |
Wholesale(1) | | $ | 137 | | | $ | 176 | | | $ | (39) | | | $ | 308 | | | $ | 351 | | | $ | (43) | |
Retail(1) | | 28 | | | 32 | | | (4) | | | 48 | | | 54 | | | (6) | |
Other | | 15 | | | 12 | | | 3 | | | 34 | | | 16 | | | 18 | |
Eliminations | | 1 | | | — | | | 1 | | | (2) | | | (1) | | | (1) | |
Total Adjusted EBITDA | | $ | 181 | | | $ | 220 | | | $ | (39) | | | $ | 388 | | | $ | 420 | | | $ | (32) | |
(1)Adjusted EBITDA amounts as previously reported by segment have been recast to conform with the revised segment profit measure of Adjusted EBITDA, which excludes the non-cash LIFO charge recorded by segment. The effect of the revision increased Adjusted EBITDA for Wholesale by $17 million and Retail by $2 million for the second quarter of fiscal 2022, and increased Adjusted EBITDA for Wholesale by $28 million and Retail by $2 million for fiscal 2022 year-to-date.
Net Sales
Second Quarter
Wholesale’s Net sales increased primarily due to growth in sales to new and existing customers, including an increase from higher product costs, in Supernatural, Chains and Independent retailers channels, as discussed in Results of Operations - Net Sales section above.
Retail’s Net sales increased primarily due to a 0.9% increase in identical store sales from higher average basket sizes driven by inflation, offset by lower volume.
The increase in eliminations Net sales was driven by higher sales from Other to Wholesale.
Year-to-Date
Wholesale’s Net sales increased primarily due to growth in sales to new and existing customers, including an increase from higher product costs, in Supernatural, Independent retailers and Chains channels, as discussed in Results of Operations - Net Sales section above.
Retail’s Net sales increased primarily due to a 1.4% increase in identical store sales from higher average basket sizes driven by inflation, offset by lower volume.
The increase in eliminations Net sales was driven by higher sales from Other to Wholesale.
Adjusted EBITDA
Second Quarter
Wholesale’s Adjusted EBITDA decreased 22.2% for the second quarter of fiscal 2023 as compared to the second quarter of fiscal 2022. The decrease was driven by an increase in operating expenses combined with a slight gross profit decline excluding the LIFO charge. Wholesale’s Gross profit decrease excluding the LIFO charge for the second quarter of fiscal 2023 was $3 million with a gross profit rate decrease of approximately 69 basis points primarily driven by lower current period procurement gains due to the decelerating rate of inflation and lower inventory gains. Wholesale’s Operating expense increased $36 million, which excludes depreciation and amortization, share-based compensation and other adjustments as outlined in Note 13—Business Segments. Wholesale’s operating expense rate was approximately flat compared to the second quarter of fiscal 2022. Wholesale’s depreciation and amortization expense increased $1 million compared to the second quarter of fiscal 2022.
Retail’s Adjusted EBITDA decreased 12.5% for the second quarter of fiscal 2023 as compared to the second quarter of fiscal 2022. The decrease was driven by higher operating expenses primarily due to new store start-up costs and a slightly lower gross profit rate compared to the second quarter of fiscal 2022. Retail’s Adjusted EBITDA excludes depreciation and amortization, share-based compensation, LIFO charge and other adjustments as outlined in Note 13—Business Segments. Retail’s depreciation and amortization expense increased $2 million compared to the second quarter of fiscal 2022.
Year-to-Date
Wholesale’s Adjusted EBITDA decreased 12.3% for fiscal 2023 year-to-date from fiscal 2022 year-to-date. The decrease was driven by an increase in operating expenses in excess of gross profit growth excluding the LIFO charge. Wholesale’s Gross profit increase excluding the LIFO charge for fiscal 2023 year-to-date was $62 million with a gross profit rate decrease of approximately 37 basis points primarily driven by lower current period procurement gains due to the decelerating rate of inflation and inventory gains as compared to fiscal 2022 year-to-date, and a decrease from changes in customer mix. Wholesale’s Operating expense increased $105 million, which excludes depreciation and amortization, share-based compensation and other adjustments as outlined in Note 13—Business Segments. Wholesale’s operating expense rate increased 7 basis points primarily driven by higher occupancy costs in fiscal 2023 year-to-date. Wholesale’s depreciation and amortization expense increased $4 million compared to fiscal 2022 year-to-date.
Retail’s Adjusted EBITDA decreased 11.1% for fiscal 2023 year-to-date as compared to fiscal 2022 year-to-date, driven by higher operating expenses from higher employee-related costs and new store start-up costs. Retail’s Adjusted EBITDA excludes depreciation and amortization, share-based compensation, LIFO charge and other adjustments as outlined in Note 13—Business Segments.
LIQUIDITY AND CAPITAL RESOURCES
Highlights
•Total liquidity as of January 28, 2023 was $1,573 million and consisted of the following:
◦Unused credit under our $2,600 million asset-based revolving credit facility (the “ABL Credit Facility”) was $1,533 million, which decreased $94 million from $1,627 million as of July 30, 2022, primarily due to increased cash utilized to fund working capital increases, partially offset by the reduction in ABL borrowings related to the monetization of certain receivables net of the related $125 million voluntary prepayment on our term loan agreement dated as of October 22, 2018 (as amended, the “Term Loan Agreement”) described below.
◦Cash and cash equivalents was $40 million, which decreased $4 million from $44 million as of July 30, 2022.
•Our total debt decreased $46 million to $2,077 million as of January 28, 2023 from $2,123 million as of July 30, 2022, primarily driven by debt repayments from net cash flow from operating activities, partially offset by payments for capital expenditures and repurchases of common stock during fiscal 2023 year-to-date.
•Working capital decreased $35 million to $1,345 million as of January 28, 2023 from $1,380 million as of July 30, 2022, primarily due to lower accounts receivable levels resulting from the monetization of certain receivables, partially offset by an increase in inventories net of the associated increase in accounts payable.
•In the second quarter of fiscal 2023, we monetized certain receivables previously within accounts receivable, pursuant to a purchase agreement with a third-party financial institution for the sale of certain receivables up to $300 million, which generated net cash proceeds of $282 million. These proceeds were used to make a $125 million voluntary prepayment on the Term Loan Facility and reduce outstanding borrowings under the ABL Credit Facility.
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 2023 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 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. 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. 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 2023 year-to-date, we borrowed a net $83 million under the ABL Credit Facility and made voluntary prepayments on the Term Loan Facility totaling $130 million with a portion of the proceeds received from monetizing certain receivables previously within accounts receivable, and from asset sales.
Our Term Loan Agreement and Senior Notes do not include any financial maintenance covenants. Our ABL Loan Agreement subjects us to a fixed charge coverage ratio of at least 1.0 to 1.0, calculated at the end of each of our fiscal quarters on a rolling four quarter basis, if the adjusted aggregate availability is ever less than the greater of (i) $210 million and (ii) 10% of the aggregate borrowing base. 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 on Form 10-Q. 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.
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.
As of January 28, 2023, we had an aggregate of $1,000 million of floating rate notional debt subject to active interest rate swap contracts, which effectively hedge the SOFR component of our interest rate payments through pay fixed and receive floating interest rate swap agreements. These fixed rates range from 2.360% to 2.875%, with maturities between March 2023 and October 2025. The fair value of these interest rate derivatives represent a current asset of $17 million and a long-term asset of $5 million as of January 28, 2023, and are subject to volatility based on changes in market interest rates.
From time to time, we enter into fixed price fuel supply agreements and foreign currency hedges. As of January 28, 2023, we had fixed price fuel contracts and foreign currency forward agreements outstanding. Gains and losses and the outstanding assets and liabilities from these arrangements are insignificant.
Payments for Capital Expenditures
Our capital expenditures for fiscal 2023 year-to-date were $151 million compared to $106 million for fiscal 2022 year-to-date, an increase of $45 million, primarily due to investments in automation. Our capital spending for fiscal 2023 and 2022 year-to-date principally included information technology and supply chain expenditures. Fiscal 2022 year-to-date included continued investment in the new Allentown, Pennsylvania distribution center. Fiscal 2023 capital spending is expected to be approximately $350 million and include projects that automate, optimize and expand our distribution network, and finance our technology platform investments. We expect to finance fiscal 2023 capital 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 Condensed Consolidated Statements of Cash Flows:
| | | | | | | | | | | | | | | | | |
| 26-Week Period Ended | | |
(in millions) | January 28, 2023 | | January 29, 2022 | | Change |
Net cash provided by operating activities | $ | 270 | | | $ | 43 | | | $ | 227 | |
Net cash used in investing activities | (143) | | | (129) | | | (14) | |
Net cash (used in) provided by financing activities | (131) | | | 91 | | | (222) | |
| | | | | |
Net (decrease) increase in cash and cash equivalents | (4) | | | 5 | | | (9) | |
Cash and cash equivalents, at beginning of period | 44 | | | 40 | | | 4 | |
Cash and cash equivalents, at end of period | $ | 40 | | | $ | 45 | | | $ | (5) | |
The increase in net cash provided by operating activities in fiscal 2023 year-to-date compared to fiscal 2022 year-to-date was primarily due to the monetization of certain receivables in fiscal 2023 year-to-date discussed above, pursuant to a purchase agreement with a third-party financial institution, which generated net cash proceeds of $282 million.
The increase in net cash used in investing activities in fiscal 2023 year-to-date compared to fiscal 2022 year-to-date was primarily due to higher capital expenditures, as described above, partially offset by a reduction in payments for investments.
The increase in net cash used in financing activities in fiscal 2023 year-to-date compared to fiscal 2022 year-to-date was primarily due to lower net borrowings under the ABL Credit Facility resulting from increases in net cash provided by operating activities, net of cash used in investing activities, as described above.
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.
Except as otherwise disclosed in Note 14—Commitments, Contingencies and Off-Balance Sheet Arrangements and Note 7—Long-Term Debt, there have been no material changes in our contractual obligations since the end of fiscal 2022. Refer to Item 7 of the Annual Report for additional information regarding our contractual obligations.
Pension and Other Postretirement Benefit Obligations
In fiscal 2023, no minimum pension contributions are required to be made under the SUPERVALU INC. Retirement Plan under Employee Retirement Income Security Act of 1974, as amended (“ERISA”). An insignificant amount of contributions are expected to be made to defined benefit pension plans and postretirement benefit plans in fiscal 2023. We fund our defined benefit pension plans based on the minimum contribution required under ERISA, the Pension Protection Act of 2006 and other applicable laws and additional contributions made at our discretion. We 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 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 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 $45 million in fiscal 2022. In fiscal 2023, 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.
Refer to Note 13—Benefit Plans in Part II, Item 8 of the Annual Report for additional information regarding the plans in which we participate.
Share Repurchases
In September 2022, our Board of Directors authorized a new repurchase program for up to $200 million of our common stock over a term of four years (the “2022 Repurchase Program”). Under the 2022 Repurchase Program, we repurchased approximately 390,000 shares of our common stock for a total cost of $17 million in the second quarter of fiscal 2023 and approximately 729,000 shares of our common stock for a total cost of $29 million in fiscal 2023 year-to-date. As of January 28, 2023, we had $171 million remaining authorized under the 2022 Repurchase Program.
We will manage the timing of any repurchases of our common stock in response to market conditions and other relevant factors, including any limitations on our ability to make repurchases under the terms of our ABL Credit Facility, Term Loan Facility and Senior Notes. We may implement the 2022 Repurchase Program pursuant to a plan or plans meeting the conditions of Rule 10b5-1 under the Exchange Act.
Critical Accounting Policies and Estimates
There were no material changes to our critical accounting policies during the period covered by this Quarterly Report on Form 10-Q. Refer to the description of critical accounting policies included in Item 7 of our Annual Report.
Seasonality
Overall product sales are fairly balanced throughout the year, although demand for certain products of a seasonal nature may be influenced by holidays, changes in seasons or other annual events. Our working capital needs are generally greater during the months of and leading up to high sales periods, such as the buildup in inventory leading to the calendar year-end holidays. Our inventory, accounts payable and accounts receivable levels may be impacted by macroeconomic impacts and changes in food-at-home purchasing rates. These effects can result in normal operating fluctuations in working capital balances, which in turn can result in changes to cash flow from operations that are not necessarily indicative of long-term operating trends.