Albertsons Companies, Inc.: Form 10-Q for the period ended Dec 4, 2021

FORWARD-LOOKING STATEMENTS AND FACTORS THAT IMPACT OUR OPERATING RESULTS AND TRENDS

This Form 10-Q contains "forward-looking statements" within the meaning of the federal securities laws. The "forward-looking statements" include our current expectations, assumptions, estimates and projections about our business and our industry. They include statements relating to our future operating or financial performance which the Company believes to be reasonable at this time. You can identify forward-looking statements by the use of words such as "outlook," "may," "should," "could," "estimates," "predicts," "potential," "continue," "anticipates," "believes," "plans," "expects," "future" and "intends" and similar expressions which are intended to identify forward-looking statements.

These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict, including, among others:

• changes in macroeconomic conditions;
• retail consumer behavior and environment and the Company's industry;
• ability to attract and retain qualified associates;
• failure to achieve productivity initiatives;
• increased rates of food price inflation or future deflation; and
• factors related to the continued impact of the COVID-19 pandemic, about which there are still many unknowns, including its duration, recurrence, new variants, status and effectiveness of vaccinations, duration and scope of related government orders, financial assistance programs, mandates and regulations and the extent of the overall impact to our business and the communities we serve.

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements and risk factors. Forward-looking statements contained in this Form 10-Q reflect our view only as of the date of this Form 10-Q. We undertake no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

While certain aspects of our financial results have been favorably impacted by increased demand during the COVID-19 pandemic, in addition to favorable consumer conditions including incremental financial assistance provided by various government agencies, our business continues to experience challenges to meet customer demand. We have recently experienced increased labor shortages due to recent COVID-19 variants resulting in transportation and retail store disruptions. Together with labor shortages and higher demand for talent, the current economic environment is driving higher wages. The current labor shortages could also impact our ability to negotiate acceptable contracts with labor unions which could result in strikes by affected workers and thereby significantly disrupt our operations. Our ability to meet labor needs, control wage and labor-related costs and minimize labor disruptions will be key to our success of operating our business and executing our business strategies. Furthermore, our business is experiencing an inflationary environment and food price inflation, which has benefited our sales and gross margin growth but has negatively impacted our gross margin rates. In addition, a deflationary market in future periods could reduce sales growth and earnings. We are unable to predict whether the current inflationary environment will continue or whether a deflationary trend will occur. We expect the economic environment to remain uncertain as we navigate the COVID-19 pandemic, labor challenges and the current inflationary environment.

Such risks and uncertainties could cause actual results to differ materially from those expressed or forecasted by us. In evaluating our financial results and forward-looking statements, you should carefully consider the risks and uncertainties more fully described in the "Risk Factors" section or other sections in our reports filed with the SEC including the most recent annual report on Form 10-K and any subsequent periodic reports on Form 10-Q and current reports on Form 8-K.

As used in this Form 10-Q, unless the context otherwise requires, references to "Albertsons," the "Company," "we," "us" and "our" refer to Albertsons Companies, Inc. and, where appropriate, its subsidiaries.

NON-GAAP FINANCIAL MEASURES

We define EBITDA as generally accepted accounting principles ("GAAP") earnings (net loss) before interest, income taxes, depreciation and amortization. We define Adjusted EBITDA as earnings (net loss) before interest, income taxes, depreciation and amortization, further adjusted to eliminate the effects of items management does not consider in assessing our ongoing core performance. We define Adjusted net income as GAAP Net income adjusted to eliminate the effects of items management does not consider in assessing our ongoing core performance. We define Adjusted net income per Class A common share as Adjusted net income divided by the weighted average diluted Class A common shares outstanding, as adjusted to reflect all restricted stock units ("RSUs") and restricted common stock ("RSAs") outstanding at the end of the period, as well as the conversion of Convertible Preferred Stock when it is antidilutive for GAAP. We define Net Debt as total debt (which includes finance lease obligations and is net of deferred financing costs and original issue discount) minus unrestricted cash and cash equivalents and we define Net Debt Ratio as the ratio of Net Debt to Adjusted EBITDA for the rolling 52 or 53 week period. See "Results of Operations" for further discussion and a reconciliation of Adjusted EBITDA, Adjusted net income and Adjusted net income per Class A common share.

EBITDA, Adjusted EBITDA, Adjusted net income and Adjusted net income per Class A common share (collectively, the "Non-GAAP Measures") are performance measures that provide supplemental information we believe is useful to analysts and investors to evaluate our ongoing results of operations, when considered alongside other GAAP measures such as Net income, operating income and gross margin. These Non-GAAP Measures exclude the financial impact of items management does not consider in assessing our ongoing core operating performance, and thereby provide useful measures to analysts and investors of our operating performance on a period-to-period basis. Other companies may have different definitions of Non-GAAP Measures and provide for different adjustments, and comparability to our results of operations may be impacted by such differences. We also use Adjusted EBITDA and Net Debt Ratio for board of director and bank compliance reporting. Our presentation of Non-GAAP Measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

Non-GAAP Measures should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using Non-GAAP Measures only for supplemental purposes.

THIRD QUARTER OF FISCAL 2021 OVERVIEW

In addition to comparisons of the 12 and 40 weeks ended December 4, 2021 ("third quarter of fiscal 2021" and "first 40 weeks of fiscal 2021") to the 12 and 40 weeks ended December 5, 2020 ("third quarter of fiscal 2020" and "first 40 weeks of fiscal 2020"), given the significant variations that occurred in our business during fiscal 2020 due to the COVID-19 pandemic, we also provide a supplemental comparison of the third quarter of fiscal 2021 and first 40 weeks of fiscal 2021 to the 12 and 40 weeks ended November 30, 2019 ("third quarter of fiscal 2019" and "first 40 weeks of fiscal 2019") for certain financial measures to demonstrate the two-year growth in our business.

As of December 4, 2021, we operated 2,278 retail food and drug stores with 1,722 pharmacies, 399 associated fuel centers, 22 dedicated distribution centers and 20 manufacturing facilities. With a strong consumer environment, we continue to make significant progress against all of our strategic priorities, including in-store excellence, accelerating our digital and omnichannel capabilities, increasing productivity and strengthening our talent and culture. Identical sales increased 5.2%, excluding fuel, during the third quarter of fiscal 2021, resulting in two-year stacked identical sales growth of 17.5%.

We continue to gain market share in food market on a one and two-year basis, and in the third quarter of fiscal 2021 we also gained market share in Multi Outlet ("MULO") on a one and two-year basis. Food market generally includes traditional supermarkets while MULO includes most food market, drug, mass merchants, club, dollar and military stores that sell food.

Our digital initiatives continue to resonate with our customers, underscoring our strong omnichannel capabilities that allow customers to complete their shopping with us in any way they want. During the third quarter of fiscal 2021, digital sales increased 9% compared to the third quarter of fiscal 2020 and 234% on a two-year stacked basis. During the third quarter of fiscal 2021, we expanded our Drive Up & Go curbside pickup service to 1,930 locations and offered delivery services across more than 2,000 of our stores. In our delivery service, we have expanded first party locations, and continue to work with third party services to engage with customers on the platform of their choice. In addition to our continuing partnership with Instacart, we expanded our partnership with DoorDash to offer on-demand grocery delivery service where customers can receive a broad assortment in under one hour. We also recently launched a similar partnership with Uber, where customers can order a full assortment of groceries on the Uber platform.

In the just for U loyalty program, ongoing benefit enhancements continued to accelerate membership growth, which increased 17% in the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020, reaching 28 million members. Within the program, our retention rate of actively engaged members, those that redeemed fuel or grocery rewards during the third quarter of fiscal 2021, was more than 93%.

During the third quarter of fiscal 2021 we continued to roll out our Own Brands across all our banners, generating strong growth as our sales penetration increased by approximately 15 basis points to 25.1% compared to the third quarter of fiscal 2020, with the strongest performance in the floral, deli and food service departments. During the first 40 weeks of fiscal 2021, we have launched 540 new products, including 143 in the third quarter of fiscal 2021, and are on track to launch over 800 items in fiscal 2021. To offset cost inflation and fund future investments, we continue to identify and drive productivity. During the third quarter of fiscal 2021, we have continued to make significant improvements in promotional effectiveness, procurement and supply chain, labor efficiency and shrink.

Our capital allocation strategy balances investing for the future, strengthening our balance sheet and returns to shareholders through a combination of dividends and opportunistic share repurchases. Capital expenditures were approximately $1,216 million during the first 40 weeks of fiscal 2021 as we opened nine new stores and completed 146 upgrades and remodels. Our balance sheet remains strong with a Net Debt Ratio of 1.3x as of the end of the third quarter of fiscal 2021. Capital returns to shareholders during the first 40 weeks of fiscal 2021 included our

$0.10 per share quarterly dividend, which was increased to $0.12 per share of Class A common stock during the third quarter of fiscal 2021.

To enable the delivery of 37 million healthy breakfasts to those in need, we collected $9 million in the third quarter of fiscal 2021 thanks to the generosity of our customers who contributed at our check stands. Another 100,000 meals were provided to those in need with the help of one of our third-party delivery partners at Thanksgiving. In addition, we have continued to partner with the Department of Health and Human Services and local health authorities to administer COVID-19 vaccines to our local communities and have administered approximately 11 million doses.

Third quarter of fiscal 2021 highlights

In summary, our financial and operating highlights for the third quarter of fiscal 2021 include:

• Identical sales increased 5.2%; on a two-year stacked basis identical sales growth was 17.5%
• Digital sales increased 9%; on a two-year stacked basis digital sales growth was 234%
• Net income of $425 million, or $0.74 per Class A common share
• Adjusted net income of $457 million, or $0.79 per Class A common share
• Adjusted EBITDA of $1,051 million
• Completed 70 remodel projects

Stores

The following table shows stores operating, acquired, opened and closed during the periods presented:

(1) The 40 weeks ended December 4, 2021 includes one store acquired from Kings and Balducci's that transferred to us subsequent to the end of the fourth quarter of fiscal 2020.

The following table summarizes our stores by size:

(1) In millions, reflects total square footage of retail stores operating at the end of the period.

RESULTS OF OPERATIONS

Comparison of Third Quarter of Fiscal 2021 and First 40 Weeks of Fiscal 2021 to Third Quarter of Fiscal 2020 and First 40 Weeks of Fiscal 2020:

The following tables and related discussion set forth certain information and comparisons regarding the components of our Condensed Consolidated Statements of Operations for the third quarter of fiscal 2021 and first 40 weeks of fiscal 2021 to the third quarter of fiscal 2020 and first 40 weeks of fiscal 2020 (in millions, except per share data).

Net Sales and Other Revenue

Net sales and other revenue increased 8.6% to $16,728.4 million for the third quarter of fiscal 2021 from $15,408.9 million for the third quarter of fiscal 2020. The increase in Net sales and other revenue was driven by our 5.2% increase in identical sales, as well as higher fuel sales and sales related to stores acquired and opened since the third quarter of fiscal 2020. Retail price inflation and incremental sales related to administering COVID-19 vaccines contributed to the 5.2% identical sales increase.

Net sales and other revenue increased 1.1% to $54,503.5 million for the first 40 weeks of fiscal 2021 from $53,918.1 million for the first 40 weeks of fiscal 2020. The increase in Net sales and other revenue was driven by higher fuel sales and sales related to the stores acquired and opened since the first 40 weeks of fiscal 2020, offset by our 2.3% decrease in identical sales, which was primarily driven by the impact of significantly elevated demand at the onset of the COVID-19 pandemic in the first quarter of fiscal 2020. The decrease in our identical sales for the first 40 weeks of fiscal 2021 was favorably impacted by retail price inflation and incremental sales related to administering COVID-19 vaccines.

Identical Sales, Excluding Fuel

Identical sales include stores operating during the same period in both the current year and the prior year, comparing sales on a daily basis. Direct to consumer digital sales are included in identical sales, and fuel sales are excluded from identical sales. Acquired stores become identical on the one-year anniversary date of the acquisition. Identical sales for the 12 and 40 weeks ended December 4, 2021 and the 12 and 40 weeks ended December 5, 2020, respectively, were:

Gross Margin

Gross margin represents the portion of Net sales and other revenue remaining after deducting Cost of sales during the period, including purchase and distribution costs. These costs include, among other things, purchasing and sourcing costs, inbound freight costs, product quality testing costs, warehouse and distribution costs, Own Brands program costs and digital-related delivery and handling costs. Advertising, promotional expenses and vendor allowances are also components of Cost of sales.

Gross margin rate decreased to 28.9% during the third quarter of fiscal 2021 compared to 29.3% during the third quarter of fiscal 2020. Excluding the impact of fuel, gross margin rate increased 10 basis points compared to the third quarter of fiscal 2020. The increase in gross margin rate was primarily due to productivity initiatives, improved pharmacy margins related to administering COVID-19 vaccines and favorable product mix, largely offset by lower gross margin rates across certain product categories due to the rate impact of increased product costs driven by the current inflationary environment, as well as higher supply chain costs.

Gross margin rate decreased to 28.9% during the first 40 weeks of fiscal 2021 compared to 29.4% during the first 40 weeks of fiscal 2020. Excluding the impact of fuel, gross margin rate increased five basis points compared to the first 40 weeks of fiscal 2020. The increase in gross margin rate was primarily due to productivity initiatives, improved pharmacy margins related to administering COVID-19 vaccines and favorable product mix, offset by higher supply chain costs, as well as lower gross margin rates driven by the current inflationary environment predominantly experienced in the third quarter of fiscal 2021.

Selling and Administrative Expenses

Selling and administrative expenses consist primarily of store level costs, including wages, employee benefits, rent, depreciation and utilities, in addition to certain back-office expenses related to our corporate and division offices.

Selling and administrative expenses decreased to 25.4% of Net sales and other revenue during the third quarter of fiscal 2021 compared to 28.0% of Net sales and other revenue during the third quarter of fiscal 2020. Excluding the impact of fuel and the $285.7 million charge related to the withdrawal from the United Food and Commercial Workers International Union ("UFCW") Union-Industry Pension Fund ("National Fund") during the third quarter of fiscal 2020, Selling and administrative expenses as a percentage of Net sales and other revenue decreased 20 basis points. The decrease in Selling and administrative expenses was primarily attributable to lower COVID-19 related expenses and the execution of productivity initiatives, which were offset by higher employee costs, depreciation and other expenses related to our investments in our digital and omnichannel capabilities and other strategic priorities. The increase in employee costs was the result of additional labor to support the increase in fresh sales, market-driven wage rate increases, and higher equity-based compensation expense.

Selling and administrative expenses decreased to 25.6% of Net sales and other revenue during the first 40 weeks of fiscal 2021 compared to 26.2% of Net sales and other revenue for the first 40 weeks of fiscal 2020. Excluding the impact of fuel and the $285.7 million charge related to the withdrawal from the UFCW National Fund during the third quarter of fiscal 2020, Selling and administrative expenses as a percentage of Net sales and other revenue increased 60 basis points during the first 40 weeks of fiscal 2021 compared to the first 40 weeks of fiscal 2020. The increase in Selling and administrative expenses as a percentage of Net sales and other revenue was primarily attributable to higher employee costs, depreciation and other expenses related to our investments in our digital and omnichannel capabilities and other strategic priorities. The increase in employee costs was the result of additional labor to support the increase in fresh sales, market-driven wage rate increases and higher equity-based compensation expense. These increases were partially offset by lower COVID-19 related costs and execution of productivity initiatives.

Gain on Property Dispositions and Impairment Losses, Net

For the third quarter of fiscal 2021, net gain on property dispositions and impairment losses was $13.4 million, primarily driven by $15.8 million of gains from the sale of assets, partially offset by $2.4 million of asset impairments, primarily related to right-of-use assets. For the third quarter of fiscal 2020, net gain on property dispositions and impairment losses was $59.0 million, primarily driven by $62.9 million of gains from the sale of assets, partially offset by $3.9 million of asset impairments.

For the first 40 weeks of fiscal 2021, net gain on property dispositions and impairment losses was $13.3 million, primarily driven by $31.6 million of gains from the sale of assets, partially offset by $18.3 million of asset impairments, primarily related to right-of-use assets and intangible assets. For the first 40 weeks of fiscal 2020, net gain on property dispositions and impairment losses was $47.0 million, primarily driven by $73.6 million of gains from the sale of assets, partially offset by $26.6 million of asset impairments, primarily related to right-of-use assets.

Interest Expense, Net

Interest expense, net was $111.3 million during the third quarter of fiscal 2021 compared to $115.9 million during the third quarter of fiscal 2020. The decrease in interest expense was primarily attributable to lower average outstanding borrowings and lower average interest rates. The weighted average interest rate during the third quarter of fiscal 2021 was 5.4%, excluding deferred financing costs and original issue discount, compared to 5.5% during the third quarter of fiscal 2020.

Interest expense, net was $373.9 million during the first 40 weeks of fiscal 2021 compared to $425.1 million during the first 40 weeks of fiscal 2020. The decrease in interest expense was primarily attributable to lower average outstanding borrowings and lower average interest rates. The weighted average interest rate during the first 40 weeks of fiscal 2021 was 5.5%, excluding deferred financing costs and original issue discount, compared to 5.9% during the first 40 weeks of fiscal 2020.

Loss on Debt Extinguishment

Loss on debt extinguishment was $3.7 million during both the third quarter of fiscal 2021 and first 40 weeks of fiscal 2021, compared to loss on debt extinguishment of $8.6 million during the third quarter of fiscal 2020 and $57.7 million during the first 40 weeks of fiscal 2020. The loss on debt extinguishment during the third quarter and first 40 weeks of fiscal 2021 primarily consisted of a make-whole premium and write-off of deferred financing costs associated with the redemption of our 5.750% Senior Unsecured Notes due 2025 (the "2025 Notes"). The loss on debt extinguishment during the third quarter and first 40 weeks of fiscal 2020 primarily consisted of a redemption premium payment and write-off of debt discounts associated with the redemption of our 6.625% Senior Unsecured Notes due 2024 (the "2024 Notes") and partial redemption of our 2025 Notes.

Other Income, Net

For the third quarter of fiscal 2021, Other income, net was $38.3 million compared to $19.2 million for the third quarter of fiscal 2020. Other income, net during the third quarter of fiscal 2021 was primarily driven by non-service cost components of net pension and post-retirement expense, unrealized gains from non-operating investments and income related to our equity investment. Other income, net during the third quarter of fiscal 2020 was primarily driven by non-service cost components of net pension and post-retirement expense and income related to our equity investment.

For the first 40 weeks of fiscal 2021, Other income, net was $100.7 million compared to $27.5 million for the first 40 weeks of fiscal 2020. Other income, net during the first 40 weeks of fiscal 2021 was primarily driven by non-service cost components of net pension and post-retirement expense, realized and unrealized gains from non-operating investments and income related to our equity investment, partially offset by unrealized losses from non-operating investments. Other income, net during the first 40 weeks of fiscal 2020 was primarily driven by non-service cost components of net pension and post-retirement expense and income related to our equity investment, partially offset by recognized losses on interest rate swaps.

Income Taxes

Income tax expense was $98.4 million, representing a 18.8% effective tax rate, for the third quarter of fiscal 2021. Income tax expense was $29.5 million, representing a 19.3% effective tax rate, for the third quarter of fiscal 2020. The decrease in the effective income tax rate was primarily driven by incremental discrete state income tax benefits related to expired statutes and audit settlements during the third quarter of fiscal 2021.

Income tax expense was $331.2 million, representing a 22.1% effective tax rate, for the first 40 weeks of fiscal 2021. Income tax expense was $342.6 million, representing a 25.6% effective tax rate, for the first 40 weeks of fiscal 2020. The decrease in the effective income tax rate was primarily driven by the recognition of discrete state income tax benefits during the first 40 weeks of fiscal 2021 and certain nondeductible transaction-related costs incurred during the first 40 weeks of fiscal 2020.

We currently expect our annual effective tax rate for fiscal 2021 to be in the range of approximately 22.5% to 23.5%.

Net Income and Adjusted Net Income

Net income was $424.5 million, or $0.74 per Class A common share, during the third quarter of fiscal 2021 compared to $123.7 million, or $0.20 per Class A common share, during the third quarter of fiscal 2020. Adjusted net income was $457.2 million, or $0.79 per Class A common share, during the third quarter of fiscal 2021 compared to $386.6 million, or $0.66 per Class A common share, during the third quarter of fiscal 2020.

Net income was $1,164.5 million, or $1.95 per Class A common share, during the first 40 weeks of fiscal 2021 compared to $994.4, or $1.71 per Class A common share, during the first 40 weeks of fiscal 2020. Adjusted net income was $1,344.2 million, or $2.32 per Class A common share, during the first 40 weeks of fiscal 2021 compared to $1,544.2 million, or $2.62 per Class A common share, during the first 40 weeks of fiscal 2020.

Adjusted EBITDA

For the third quarter of fiscal 2021, Adjusted EBITDA was $1,051.2 million, or 6.3% of Net sales and other revenue, compared to $967.7 million, or 6.3% of Net sales and other revenue, for the third quarter of fiscal 2020. For the first 40 weeks of fiscal 2021, Adjusted EBITDA was $3,324.7 million, or 6.1% of Net sales and other revenue, compared to $3,607.1 million, or 6.7% of Net sales and other revenue for the first 40 weeks of fiscal 2020.

Supplemental Two-Year Results - Comparison of Third Quarter of Fiscal 2021 and First 40 Weeks of Fiscal 2021 to Third Quarter of Fiscal 2019 and First 40 Weeks of Fiscal 2019

The following table provides a comparison of the third quarter of fiscal 2021 and first 40 weeks of fiscal 2021 to the third quarter of fiscal 2019 and first 40 weeks of fiscal 2019 for certain financial measures, including a compounded annual growth rate ("CAGR"), to demonstrate the two-year growth in our business. We believe these supplemental comparisons provide meaningful and useful information to investors about the trends in our business relative to pre-COVID-19 pandemic periods. These comparisons should not be reviewed in isolation or considered substitutes for our financial results included elsewhere in this Form 10-Q.

(1) Excluding fuel.

Net Sales and Other Revenue

Net sales and other revenue was $16.7 billion during the third quarter of fiscal 2021 compared to $14.1 billion during the third quarter of fiscal 2019. Net sales and other revenue was $54.5 billion during the first 40 weeks of fiscal 2021 compared to $47.0 billion during the first 40 weeks of fiscal 2019. The increase in sales compared to the third quarter of fiscal 2019 and the first 40 weeks of fiscal 2019 was primarily due to the 17.5% and 16.1% increase, respectively, in two-year stacked identical sales.

Gross Margin

Gross margin rate increased to 28.9% during the third quarter of fiscal 2021 compared to 28.3% during the third quarter of fiscal 2019. Gross margin rate increased to 28.9% during the first 40 weeks of fiscal 2021 compared to 28.0% during the first 40 weeks of fiscal 2019. Excluding the impact of fuel, gross margin rate increased by approximately 40 and 75 basis points, respectively, compared to the third quarter of fiscal 2019 and first 40 weeks of fiscal 2019 primarily driven by sales leverage, productivity initiatives and improved pharmacy margins related to administering COVID-19 vaccines, partially offset by growth in digital sales and an increase in product and supply chain costs driven by the current inflationary environment.

Selling and Administrative Expenses

Selling and administrative expenses decreased to 25.4% of Net sales and other revenue during the third quarter of fiscal 2021 compared to 27.0% of Net sales and other revenue for the third quarter of fiscal 2019. Selling and administrative expenses decreased to 25.6% of Net sales and other revenue during the first 40 weeks of fiscal 2021 compared to 26.7% of sales for the first 40 weeks of fiscal 2019. Excluding the impact of fuel, selling and administrative expenses as a percentage of Net sales and other revenue decreased approximately 170 and 120 basis points, respectively, compared to the third quarter of fiscal 2019 and first 40 weeks of fiscal 2019, primarily due to sales leverage and the execution of productivity initiatives, partially offset by increases in employee costs and other expenses related to our investments in our digital and omnichannel capabilities and strategic priorities, as well as incremental COVID-19 expenses.

Reconciliation of Non-GAAP Measures

The following tables reconcile Net income to Adjusted net income, and Net income per Class A common share to Adjusted net income per Class A common share (in millions, except per share data):

30

The following table is a reconciliation of Adjusted net income to Adjusted EBITDA:

(1) Includes costs related to closures of operating facilities and third-party consulting fees related to our strategic priorities and associated business transformation.

(2) Related to conversion activities and related costs associated with integrating acquired businesses. Also includes expenses related to management fees in prior periods paid in connection with acquisition and financing activities.

(3) Includes $44.7 million in bonus payments related to front-line associates during the third quarter of fiscal 2020.

(4) Represents incremental pay that is legislatively required in certain municipalities in which we operate.

(5) Miscellaneous adjustments include the following (see table below):

(i) Primarily includes adjustments for unconsolidated equity investments and certain contract termination costs.

(6) Represents the conversion of Convertible Preferred Stock to the fully outstanding as-converted Class A common shares as of the end of each respective period, for periods in which the Convertible Preferred Stock is antidilutive under GAAP.

(7) Represents incremental unvested RSUs and unvested RSAs to adjust the diluted weighted average Class A common shares outstanding during each respective period to the fully outstanding RSUs and RSAs as of the end of each respective period.

(8) Reflects the per share impact of Non-GAAP adjustments for each period. See the reconciliation of Net income to Adjusted net income above for further details.

(9) See the reconciliation of Net income to Adjusted net income above for further details.

Non-GAAP adjustment classifications within the Consolidated Statement of Operations:

(a) Cost of sales

(b) Selling and administrative expenses

(c) Interest expense, net

(d) (Gain) loss on interest rate and commodity hedges, net:

(e) Depreciation and amortization:

(f) Miscellaneous adjustments:

32

33

The following table is a reconciliation of Adjusted net income to Adjusted EBITDA:

(1) Includes costs related to closures of operating facilities and third-party consulting fees related to our strategic priorities and associated business transformation.

(2) Related to conversion activities and related costs associated with integrating acquired businesses. Also includes expenses related to management fees in prior periods paid in connection with acquisition and financing activities.

(3) Primarily due to gains related to sale leaseback transactions in the second quarter of fiscal 2019.

(4) Includes $44.7 million in bonus payments related to front-line associates during the third quarter of fiscal 2020. Also includes $53 million of charitable contributions to our communities for hunger relief and $36.9 million in final reward payments to front-line associates at the end of the first quarter of fiscal 2020.

(5) Represents incremental pay that is legislatively required in certain municipalities in which we operate.

(6) Primarily includes costs related to store damage, inventory losses and community support as a result of the civil disruption during late May 2020 and early June 2020 in certain markets.

(7) Miscellaneous adjustments include the following (see table below):

(i) Primarily includes adjustments for pension settlement gain, unconsolidated equity investments and certain contract termination costs.

(8) Represents the conversion of Convertible Preferred Stock to the fully outstanding as-converted Class A common shares as of the end of each respective period, for periods in which the Convertible Preferred Stock is antidilutive under GAAP.

(9) Represents incremental unvested RSUs and unvested RSAs to adjust the diluted weighted average Class A common shares outstanding during each respective period to the fully outstanding RSUs and RSAs as of the end of each respective period.

(10) Reflects the per share impact of Non-GAAP adjustments for each period. See the reconciliation of Net income to Adjusted net income above for further details.

(11) See the reconciliation of Net income to Adjusted net income above for further details.

Non-GAAP adjustment classifications within the Consolidated Statement of Operations:

(a) Cost of sales

(b) Selling and administrative expenses

(c) Interest expense, net

(d) (Gain) loss on interest rate and commodity hedges, net:

(e) Depreciation and amortization:

(f) Miscellaneous adjustments:

35

LIQUIDITY AND CAPITAL RESOURCES

The following table sets forth the major sources and uses of cash and cash equivalents and restricted cash for each period (in millions):

Net Cash Provided by Operating Activities

Net cash provided by operating activities was $2,782.8 million for the first 40 weeks of fiscal 2021 compared to $2,996.0 million for the first 40 weeks of fiscal 2020. The decrease in cash flow from operations compared to the first 40 weeks of fiscal 2020 was due to changes in working capital primarily related to inventory and a deferral of approximately $396 million of the employer-paid portion of social security taxes in the first 40 weeks of fiscal 2020 together with lower Adjusted EBITDA during the first 40 weeks of fiscal 2021. These decreases were partially offset by less cash paid for income taxes and interest of $107 million and $84 million, respectively, the $147.3 million payment to the UFCW National Fund in the third quarter of fiscal 2020, the $75 million payment for the UFCW & Employers Midwest Pension Fund settlement in the first 40 weeks of fiscal 2020 and a decrease of $30.0 million in contributions to our defined benefit pension plans and post-retirement benefit plans.

Net Cash Used by Investing Activities

Net cash used in investing activities was $1,177.1 million for the first 40 weeks of fiscal 2021 compared to $944.3 million for the first 40 weeks of fiscal 2020.

For the first 40 weeks of fiscal 2021, cash used in investing activities consisted primarily of payments for property and equipment of $1,216.4 million and payments for business acquisitions of $25.4 million, partially offset by proceeds from the sale of long-lived assets of $37.8 million. Payments for property and equipment in the first 40 weeks of fiscal 2021 included the opening of nine new stores, completion of 146 remodels and increased investment in our digital technology. For the first 40 weeks of fiscal 2020, cash used in investing activities consisted primarily of payments for property and equipment of $1,083.0 million, partially offset by proceeds from the sale of assets of $143.9 million. Payments for property and equipment in the first 40 weeks of fiscal 2020 included the opening of seven new stores, completion of 225 remodels and continued investment in our digital technology. For the full fiscal year of 2021, we expect capital expenditures to be in the range of $1.8 billion to $1.9 billion.

Net Cash Used in Financing Activities

Net cash used in financing activities was $661.7 million during the first 40 weeks of fiscal 2021 compared to $643.9 million during the first 40 weeks of fiscal 2020.

Net cash used in financing activities during the first 40 weeks of fiscal 2021 consisted primarily of $330.6 million payments on long-term borrowings and dividends paid on our Class A common stock and Convertible Preferred Stock. Net cash used in financing activities during the first 40 weeks of fiscal 2020 consisted primarily of the $1.5 billion issuance of new Senior Unsecured Notes, the $1.5 billion redemption of 2024 Notes and 2025 Notes, the $2.0 billion borrowing and subsequent repayment of the ABL Facility, the repurchase of outstanding Class A common stock, the issuance of the Convertible Preferred Stock and dividends paid on our Class A common stock and Convertible Preferred Stock.

Debt Management

On October 1, 2021, we provided notice to the holders and trustee of our election to redeem the $200.0 million aggregate principal amount outstanding (the "2025 Redemption") of our 2025 Notes. The 2025 Notes were redeemed on November 1, 2021 (the "Redemption Date") using cash on hand, at a redemption price of 101.438% of the principal amount thereof plus accrued and unpaid interest on the 2025 Notes to, but excluding, the Redemption Date. We recorded a $3.7 million loss on debt extinguishment related to the 2025 Redemption, comprised of a $2.9 million make-whole premium and a $0.8 million write-off of deferred financing costs.

On December 20, 2021, subsequent to the end of the 12 weeks ended December 4, 2021, the existing ABL Facility was amended and restated to, among other things, extend the maturity date of the facility to December 20, 2026, reduce the unused line fee to 0.25% per annum and reduce the interest rate based on availability.

Liquidity and Factors Affecting Liquidity

We estimate our liquidity needs over the next 12 months to be in the range of $4.75 billion to $5.25 billion, which includes anticipated requirements for incremental working capital, capital expenditures, pension obligations, interest payments and scheduled principal payments of debt, dividends on Class A common stock and Convertible Preferred Stock, operating leases and finance leases. Based on current operating trends, we believe that cash flows from operating activities and other sources of liquidity, including borrowings under our ABL Facility, will be adequate to meet our liquidity needs for the next 12 months and for the foreseeable future. We believe we have adequate cash flow to continue to respond effectively to competitive conditions. In addition, we may enter into refinancing and sale leaseback transactions from time to time. There can be no assurance, however, that our business will continue to generate cash flow at or above current levels or that we will maintain our ability to borrow under our ABL Facility.

The holders of Convertible Preferred Stock are entitled to a quarterly dividend at a rate per annum of 6.75% of the liquidation preference per share of the Convertible Preferred Stock. On March 15, 2021, June 15, 2021 and September 15, 2021, we declared quarterly cash dividends of $29.5 million, respectively, to holders of the Convertible Preferred Stock, which was paid on March 31, 2021, June 30, 2021 and September 30, 2021, respectively. On December 15, 2021, we declared a quarterly cash dividend of $25.8 million to holders of the Convertible Preferred Stock, which was paid on December 30, 2021. In addition, the holders of Convertible Preferred Stock will participate in cash dividends that we pay on our common stock to the extent that such cash dividends exceed $206.25 million per fiscal year.

We have established a dividend policy pursuant to which we intend to pay a quarterly dividend on our Class A common stock. During the first 40 weeks of fiscal 2021, we paid quarterly cash dividends of $0.10 per share of Class A common stock on May 10, 2021 and August 10, 2021, to stockholders of record as of the close of business on April 26, 2021 and July 26, 2021, respectively. We paid cash dividends of $0.12 per share of Class A common stock on November 12, 2021 to stockholders of record as of the close of business on October 29, 2021. On January 11, 2022, we announced the next quarterly dividend payment of $0.12 per share of Class A common stock to be paid on February 10, 2022 to stockholders of record as of the close of business on January 26, 2022.

Subsequent to the end of the third quarter of fiscal 2021, certain holders of the Company's Convertible Preferred Stock converted approximately 262,601 shares of Convertible Preferred Stock into approximately 15,247,696 shares of the Company's Class A common stock. These conversions represented approximately 15% of the Convertible Preferred Stock outstanding as of the end of the third quarter of fiscal 2021.

As of December 4, 2021, we had no borrowings outstanding under out ABL Facility and total availability of $3,750.4 million (net of letter of credit usage).

Multiemployer Pension Plans

The American Rescue Plan Act ("ARP Act") establishes a special financial assistance program for financially troubled multiemployer pension plans. Under the ARP Act, eligible multiemployer plans can apply to receive a one-time cash payment in the amount projected by the Pension Benefit Guaranty Corporation ("PBGC") to pay pension benefits through the plan year ending 2051. The payment received by the multiemployer plan under this special financial assistance program would not be considered a loan and would not need to be paid back. Any financial assistance received by the multiemployer plan would need to be segregated from the other assets of the multiemployer plans and invested in investment grade bonds or other investments permitted by the PBGC.

Of the 27 multiemployer plans to which we contribute, 16 plans are classified as "Critical" or "Critical and Declining" and are potentially eligible for special financial assistance under the ARP Act. Though the amount of financial assistance that each of these 16 plans could receive will vary by plan, we currently estimate that these 16 plans represent over 90% of the $4.7 billion we estimated as our share of the underfunding of the 27 plans. On July 9, 2021, the PBGC issued its interim final rule with respect to the special financial assistance program. The PBGC interim final rule provides direction on the application requirements, identifies which plans will have priority, eligibility requirements, the determination of the amount of financial assistance to be provided and establishes conditions and restrictions that apply to plans that receive assistance. We reviewed the interim final rule and submitted comments during the 30-day comment period. On December 15, 2021, the PBGC announced that it will issue final regulations in January 2022. We expect the special financial assistance program under these final regulations to provide funding for the multiemployer plans to which we contribute to remain solvent through the next 25 to 30 years.

CRITICAL ACCOUNTING POLICIES

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a fair and consistent manner. See the Critical Accounting Policies section included in our Annual Report on Form 10-K for the fiscal year ended February 27, 2021, filed with the SEC on April 28, 2021, for a discussion of our significant accounting policies.

RECENTLY ISSUED AND RECENTLY ADOPTED ACCOUNTING STANDARDS

See Note 1 - Basis of presentation and summary of significant accounting policies of our unaudited interim Condensed Consolidated Financial Statements located elsewhere in this Form 10-Q.

There have been no material changes in our exposure to market risk from the information provided in our Annual Report on Form 10-K for the fiscal year ended February 27, 2021, filed with the SEC on April 28, 2021.

Based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934 (the "Exchange Act")) as of the end of the period covered by this Form 10-Q, our Principal Executive Officer and Principal Financial Officer concluded our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and is accumulated and communicated to management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

As part of our strategic priority of modernizing technology, we implemented a new cloud enterprise resource planning (ERP) system at the beginning of the third quarter of fiscal 2021. This ERP implementation included accounts receivable, fixed assets, project accounting, accounts payable, general ledger and consolidation applications. The ERP system, which is an integral component of our internal controls over financial reporting, will provide us with more efficient transactional processing, increased scalability and enhanced management tools for our ongoing business transformation. The ERP implementation was led by a dedicated project team using a multi-stage project plan that included an extensive assessment of design and operating effectiveness of internal controls over financial reporting which will be ongoing through the end of our fiscal year.

There were no other changes in our internal control over financial reporting during the third quarter of fiscal 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The following risk factor previously included in our Annual Report on Form 10-K for the fiscal year ended February 27, 2021, filed with the SEC on April 28, 2021, is updated as follows for the December 2021 expiration of transfer restrictions related to the Convertible Preferred Stock:

If a substantial number of shares becomes available for sale and are sold in a short period of time, the market price of our common stock could decline and our stockholders may be diluted.

If our stockholders sell substantial amounts of our common stock in the public market, the market price of our common stock could decrease. The perception in the public market that our stockholders might sell shares of common stock could also create a perceived overhang and depress the market price of our common stock. The market price for shares of our common stock may also drop when the restrictions on resale by certain of our stockholders and independent directors lapse.

The Preferred Investors were previously subject to transfer restrictions with respect to the Convertible Preferred Stock and the shares of common stock issuable pursuant to the Convertible Preferred Stock (the "Conversion Shares"). All such transfer restrictions expired in December 2021, and certain of the Preferred Investors elected to exercise their conversion rights pursuant to the Convertible Preferred Stock and sell their underlying Conversions Shares in the public market. The end of such transfer restrictions and resulting sales of such Conversion Shares may have impacted the trading price of our common stock in December 2021 and further conversions and resulting sales in the public market may further impact the trading price of our common stock.

In addition, our Sponsors and the Preferred Investors have substantial demand registration rights which they can exercise pursuant to the Registration Rights Agreement we have entered into with the Sponsors and the Preferred Investors. We have also filed a registration statement on Form S-8 under the Securities Act to register shares of our common stock or securities convertible into or exchangeable for shares of our common stock issued pursuant to our equity incentive plans. Any shares registered under any registration statement are or will be available for sale in the open market. A decline in the market price of our common stock might impede our ability to raise capital through the issuance of additional shares of our common stock or other equity securities.