Albertsons Companies, Inc. (ACI) FY 2023 MD&A

Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related notes found in "Part II—Item 8. Financial Statements and Supplementary Data" in this Form 10-K, as well as "Part II—Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the fiscal year ended February 26, 2022 filed with the SEC on April 26, 2022, which provides comparisons of fiscal 2021 and fiscal 2020. This discussion contains forward-looking statements based upon current expectations that involve numerous risks and uncertainties. Our actual results may differ materially from those contained in any forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in the section entitled "Special Note Regarding Forward-Looking Statements" set forth in Part I and in Item 1A. "Risk Factors."

Our last three fiscal years consisted of the 52 weeks ended February 25, 2023 ("fiscal 2022"), the 52 weeks ended February 26, 2022 ("fiscal 2021") and the 52 weeks ended February 27, 2021 ("fiscal 2020"). In this Management's Discussion and Analysis of Financial Condition and Results of Operations of Albertsons Companies, Inc., the words "Albertsons," the "Company," "we," "us," "our" and "ours" refer to Albertsons Companies, Inc., together with its subsidiaries.

EXECUTIVE SUMMARY - FISCAL 2022 OVERVIEW

We are one of the largest food retailers in the United States, with 2,271 stores across 34 states and the District of Columbia as of February 25, 2023. We operate 24 banners including Albertsons, Safeway, Vons, Pavilions, Randalls, Tom Thumb, Carrs, Jewel-Osco, Acme, Shaw's, Star Market, United Supermarkets, Market Street, Haggen, Kings Food Markets and Balducci's Food Lovers Market, with approximately 290,000 talented and dedicated employees, as of February 25, 2023, who serve on average 34.7 million customers each week. Additionally, as of February 25, 2023, we operated 1,722 pharmacies, 1,328 in-store branded coffee shops, 401 adjacent fuel centers, 22 dedicated distribution centers, 19 manufacturing facilities and various digital platforms.

Merger Agreement

On October 13, 2022, the Company, Kroger and Merger Sub entered into the Merger Agreement, pursuant to which Merger Sub will be merged with and into the Company (the "Merger"), with the Company surviving the Merger as the surviving corporation and a direct, wholly owned subsidiary of Parent.

Pursuant to the Merger Agreement, (i) each share of Class A common stock of the Company issued and outstanding immediately prior to the effective time of the Merger (the "Effective Time"), shall be converted automatically at the Effective Time into the right to receive from Parent $34.10 per share in cash, without interest, and (ii) each share of Series A preferred stock of the Company issued and outstanding immediately prior to the Effective Time shall be converted automatically at the Effective Time into the right to receive from Parent $34.10 per share in cash on an as-converted basis, without interest. The $34.10 per share is subject to certain reductions as described in "Part II—Item 8. Financial Statements and Supplementary Data—Note 2".

The Company has filed with the SEC a definitive information statement on Schedule 14C with respect to the approval of the Merger and commenced mailing of the definitive information statement to the Company's stockholders on April 21, 2023. You may obtain copies of all documents filed by the Company with the SEC regarding this transaction, free of charge, at the SEC's website, www.sec.gov or from the Company's website at https://www.albertsonscompanies.com/investors/overview/.

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Special Dividend

On October 13, 2022, we declared a special cash dividend of $6.85 per share of Class A common stock (the "Special Dividend"), payable to stockholders of record, including holders of Series A preferred stock on an as-converted basis, as of the close of business on October 24, 2022, and was originally scheduled to be paid on November 7, 2022. As discussed in "Part II—Item 8. Financial Statements and Supplementary Data—Note 9", on January 17, 2023 the temporary restraining order issued by the courts of the State of Washington was lifted, and on January 20, 2023, the Special Dividend of $3,916.9 million was paid.

Fiscal 2022 highlights

In summary, our financial and operating highlights for fiscal 2022 include:

•Identical sales increased 6.9%

•Digital sales increased 28%

•Loyalty members increased 15% to over 34 million

•Net income of $1,514 million, or $2.27 per Class A common share

•Adjusted net income of $1,965 million, or $3.37 per Class A common share

•Adjusted EBITDA of $4,677 million

•Operating cash flows of $2,854 million

•Continued modernization of our store fleet, including completing 173 remodels and opening five new stores

Stores

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

(1) Fiscal 2021 includes one store acquired from Kings and Balducci's in fiscal 2020 that transferred to us in fiscal 2021.

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.

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,

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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 and awards outstanding for the period, as well as the conversion of Convertible Preferred Stock when it is antidilutive for GAAP.

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, gross margin and net income per Class A common share. 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 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.

RESULTS OF OPERATIONS

The following information summarizes the components of our Consolidated Statements of Operations for fiscal 2022 compared to fiscal 2021.

Summary of Consolidated Statements of Operations (dollars in millions, except per share data):

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Net Sales and Other Revenue

Net sales and other revenue increased $5,762.7 million, or 8.0%, from $71,887.0 million in fiscal 2021 to $77,649.7 million in fiscal 2022. The increase in Net sales and other revenue in fiscal 2022 as compared to fiscal 2021 was driven by our 6.9% increase in identical sales and higher fuel sales, with retail price inflation, growth in pharmacy and our 28% increase in digital sales as the primary drivers of the identical sales increase. The components of the change in Net sales and other revenue for fiscal 2022 were as follows (in millions):

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 results, on an actual basis, for the past three fiscal years were as follows:

The following table represents Net sales and other revenue by product type (in millions):

(1) Digital related sales are included in the categories to which the revenue pertains.

(2) Consists primarily of general merchandise, grocery, dairy and frozen foods.

(3) Consists primarily of produce, meat, deli and prepared foods, bakery, floral and seafood.

(4) Consists primarily of wholesale revenue to third parties, commissions and other miscellaneous revenue.

Gross Margin

Gross margin represents the portion of Net sales and other revenue remaining after deducting the 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, warehousing 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.

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Gross margin rate decreased 80 basis points to 28.0% in fiscal 2022 compared to 28.8% in fiscal 2021. Excluding the impacts of fuel and LIFO, gross margin rate decreased 46 basis points. Pharmacy operations drove approximately half of the rate decrease with the remaining decrease being the result of increases in product, shrink and supply chain costs, as well as increases in picking and delivery costs related to the continued growth in digital sales, partially offset by the benefits of ongoing productivity initiatives. The decrease in rate related to pharmacy operations was primarily due to fewer COVID-19 vaccines in fiscal 2022. We administered approximately 4.1 million COVID-19 vaccinations during fiscal 2022, compared to approximately 11.0 million during 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 30 basis points to 25.2% of Net sales and other revenue in fiscal 2022 from 25.5% in fiscal 2021. Excluding the impacts of fuel and the withdrawal from the Combined Plan, Selling and administrative expenses as a percentage of Net sales and other revenue decreased eight basis points during fiscal 2022 compared to fiscal 2021. The decrease in Selling and administrative expenses was primarily attributable to the benefit of ongoing productivity initiatives, lower COVID-19 related expenses and sales leverage, partially offset by incremental legal and regulatory accruals and settlements, higher employee costs, investments related to the acceleration of our digital and omnichannel capabilities and merger-related costs. The increase in employee costs was the result of market-driven wage rate increases and higher equity-based compensation expense.

Gain on Property Dispositions and Impairment Losses, Net

For fiscal 2022, net gain on property dispositions and impairment losses was $147.5 million, primarily driven by $152.6 million of gains from the sale of real estate assets, partially offset by $5.1 million of asset impairments. For fiscal 2021, net gain on property dispositions and impairment losses was $15.0 million, primarily driven by $44.6 million of gains from the sale of assets, partially offset by $31.1 million of asset impairments, primarily related to right-of-use assets and intangible assets.

Interest Expense, Net

Interest expense, net was $404.6 million in fiscal 2022 compared to $481.9 million in fiscal 2021. The decrease in Interest expense, net was primarily due to higher interest income, as well as lower average interest rates. The weighted average interest rate was 5.3% and 5.5% during fiscal 2022 and fiscal 2021, respectively, excluding amortization of debt discounts and deferred financing costs.

Loss on Debt Extinguishment

There was no Loss on debt extinguishment during fiscal 2022. During fiscal 2021, we redeemed the remaining $200.0 million aggregate principal amount outstanding (the "2025 Redemption") of our 5.750% senior unsecured notes due September 2025 (the "2025 Notes"), using cash on hand, at a redemption price of 101.438% of the principal amount thereof plus accrued and unpaid interest. The Company recorded a $3.7 million loss on debt extinguishment related to the 2025 Redemption, comprised of a $2.9 million redemption premium and a $0.8 million write-off of deferred financing costs.

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Other Income, Net

For fiscal 2022, other income, net was $33.0 million primarily driven by non-service cost components of net pension and post-retirement income and income related to our equity investment, partially offset by unrealized losses from non-operating investments. For fiscal 2021, other income, net was $148.2 million primarily driven by non-service cost components of net pension and post-retirement income, realized and unrealized gains from non-operating investments and income related to our equity investment, partially offset by unrealized losses from non-operating investments.

Income Taxes

Income tax expense was $422.0 million, representing a 21.8% effective tax rate, in fiscal 2022, and $479.9 million, representing a 22.9% effective tax rate, in fiscal 2021. The favorability in the effective tax rate during fiscal 2022 was primarily driven by the recognition of discrete income tax benefits related to expired statutes and audit settlements, as well as certain tax credits.

Net Income and Adjusted Net Income

Net income was $1,513.5 million or $2.27 per share during fiscal 2022 compared to $1,619.6 million or $2.70 per share during fiscal 2021. Adjusted net income was $1,965.1 million, or $3.37 per share, during fiscal 2022 compared to $1,781.0 million, or $3.07 per share, during fiscal 2021.

Adjusted EBITDA

Adjusted EBITDA was $4,677.0 million, or 6.0% of Net sales and other revenue, during fiscal 2022 compared to $4,398.4 million, or 6.1% of Net sales and other revenue, during fiscal 2021.

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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 (dollars in millions, except per share data):

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

(1) Includes costs associated with third-party consulting fees related to our operational priorities and associated business transformation, as well as closures of operating facilities.

(2) Includes $44.7 million in bonus payments 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.

(3) Represents temporary incremental pay that was legislatively required in certain municipalities in which we operate.

(4) 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.

(5) Primarily relates to third-party advisor fees and retention program expense related to the proposed Merger with Kroger and costs in connection with our previously-announced Board-led review of potential strategic alternatives.

(6) Related to the Combined Plan during the second quarter of fiscal 2022, fourth quarter of fiscal 2021 and the fourth quarter of fiscal 2020, and the withdrawal from the UFCW National Fund during the third quarter of fiscal 2020. See "Part II - Item 8. Financial Statements and Supplementary Data - Note 12" for more information.

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

(i) Primarily includes adjustments for unconsolidated equity investments, certain contract terminations and other costs not considered in our core performance.

(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. Fiscal 2022 reflects the impact of the Special Dividend that is attributable to the holders of Convertible Preferred Stock on an as-converted basis.

(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 for 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.

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

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

(a) Cost of sales

(b) Selling and administrative expenses

(c) Interest expense, net

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

(e) Depreciation and amortization:

(f) Miscellaneous adjustments:

LIQUIDITY AND FINANCIAL 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 $2,853.9 million during fiscal 2022 compared to net cash provided by operating activities of $3,513.4 million during fiscal 2021. The decrease in cash flow from operating activities during fiscal 2022 compared to fiscal 2021 was due to changes in working capital primarily related to inventory and accounts payable. These decreases were partially offset by an increase in Adjusted EBITDA and less cash paid for interest and income taxes during fiscal 2022.

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Net Cash Used In Investing Activities

Net cash used in investing activities during fiscal 2022 was $1,977.3 million primarily due to payments for property, equipment and intangibles of $2,156.7 million, partially offset by proceeds primarily from the sale of real estate assets of $195.2 million. Payments for property, equipment and intangibles included continued investment in our digital and technology platforms, the completion of 173 remodels and the opening of five new stores.

Net cash used in investing activities during fiscal 2021 was $1,538.9 million primarily due to payments for property, equipment and intangibles of $1,594.8 million, partially offset by proceeds from the sale of assets of $51.9 million. Payments for property, equipment and intangibles included the completion of 236 remodels, the opening of 10 new stores and continued investment in our digital and technology platforms.

In fiscal 2023, we expect capital expenditures to be in the range of $2.0 billion to $2.1 billion.

Net Cash Used In Financing Activities

Net cash used in financing activities was $3,365.4 million in fiscal 2022 primarily consisting of dividends paid on our Class A common stock and Convertible Preferred Stock, including the $3,916.9 million payment of the Special Dividend during the fourth quarter of fiscal 2022, partially offset by the $1,400.0 million borrowing and $400.0 million subsequent partial repayment of the ABL Facility in respect of the Special Dividend. Proceeds from the issuance of long-term debt and payments on long-term debt also included a $750 million issuance and subsequent $750 million redemption of senior unsecured notes (as further discussed below under the caption Debt Management).

Net cash used in financing activities was $789.5 million in fiscal 2021 primarily consisting of payments on long-term debt and finance leases of $408.9 million and dividends paid on our Class A common stock and Convertible Preferred Stock. Payments on long-term debt principally consisted of the 2025 Redemption and the full payment on our Safeway 4.75% notes at maturity.

See "Part II—Item 8. Financial Statements and Supplementary Data—Note 7 and Note 9" for additional information.

Debt Management

Total debt, including both the current and long-term portions of finance lease obligations, net of debt discounts and deferred financing costs, increased $945.0 million to $8,910.1 million as of the end of fiscal 2022 compared to $7,965.1 million as of the end of fiscal 2021.

Outstanding debt, including current maturities, net of debt discounts and deferred financing costs, principally consisted of (in millions):

On November 2, 2022, we provided notice to the lenders to borrow $1,400.00 million under the amended and restated senior secured asset-based loan facility (as amended, the "ABL Facility"), which together with cash on hand was to be used to fund the payment of the Special Dividend during the fourth quarter of fiscal 2022. As of

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February 25, 2023, we had $1,000.0 million of borrowings that remained outstanding under the ABL Facility and total availability of $2,946.7 million (net of letter of credit usage).

On February 13, 2023, we completed the issuance of $750.0 million in aggregate principal amount of 6.500% senior unsecured notes due February 15, 2028 (the "New 2028 Notes"). Interest on the New 2028 Notes is payable semi-annually in arrears on February 15 and August 15 of each year, commencing on August 15, 2023. On February 15, 2023, proceeds from the New 2028 Notes, together with approximately $7.1 million of cash on hand, were used to (i) repay in full all $750.0 million outstanding of our 3.50% senior unsecured notes due February 15, 2023 and (ii) pay fees and expenses related to the issuance of the New 2028 Notes.

During fiscal 2022 and fiscal 2021, there were no financial maintenance covenants in effect under the ABL Facility because the conditions had not been met.

See "Part II—Item 8. Financial Statements and Supplementary Data—Note 7" for additional information.

Dividends

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. 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. Cash dividends paid to holders of the Convertible Preferred Stock were $65.3 million, $114.6 million and $66.0 million during fiscal 2022, fiscal 2021 and fiscal 2020, respectively. On March 15, 2023, we declared a quarterly cash dividend of $0.8 million to holders of Convertible Preferred Stock, which was paid on March 31, 2023.

We have established a dividend policy pursuant to which we intend to pay a quarterly dividend on our Class A common stock. Cash dividends paid on our Class A common stock were $255.1 million ($0.48 per common share), $207.4 million ($0.44 per common share) and $93.7 million ($0.20 per common share) during fiscal 2022, fiscal 2021 and fiscal 2020, respectively. On April 11, 2023, we announced the next quarterly dividend payment of $0.12 per share of Class A common stock to be paid on May 10, 2023 to stockholders of record as of the close of business on April 26, 2023.

On October 13, 2022, we declared the Special Dividend, payable to stockholders of record, including holders of Series A preferred stock on an as-converted basis, as of the close of business on October 24, 2022, and was originally scheduled to be paid on November 7, 2022. As discussed in Part II—Item 8. Financial Statements and Supplementary Data—Note 9, on January 17, 2023 the temporary restraining order issued by the courts of the State of Washington was lifted, and on January 20, 2023, the Special Dividend of $3,916.9 million was paid.

Liquidity and Factors Affecting Liquidity

Based on current operating trends, we believe that we have significant sources of cash to meet our liquidity needs for the next 12 months and for the foreseeable future, including cash on hand, cash flows from operating activities and other sources of liquidity, including borrowings under our ABL Facility. We estimate our liquidity needs over the next 12 months to be in the range of $5,200 million to $6,200 million. This includes $1,000.0 million related to outstanding borrowings under our ABL Facility for which we may, at our discretion, elect to pay all or a portion of the outstanding balance within the next 12 months; and anticipated requirements for incremental working capital, incremental merger costs, including costs related to the separation and establishment of SpinCo, capital expenditures, pension obligations, interest payments, quarterly dividends on Class A common stock and Convertible Preferred Stock, operating leases and finance leases. In addition, we may enter into refinancing and sale leaseback transactions from time to time. We believe we have adequate cash flow to continue to maintain our current debt ratings and to respond effectively to competitive conditions.

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The table below presents our material cash requirements as of February 25, 2023 (in millions) (1):

(1) The cash requirements table excludes funding of pension and other postretirement benefit obligations, which totaled $27.3 million in fiscal 2022 and is expected to total approximately $18 million in fiscal 2023. This table also excludes recurring contributions under various multiemployer pension plans, which totaled $546.5 million in fiscal 2022 and is expected to total approximately $570 million in fiscal 2023.

(2) Long-term debt amounts exclude any debt discounts and deferred financing costs. See "Part II—Item 8. Financial Statements and Supplementary Data—Note 7" for additional information.

(3) Amounts include contractual interest payments using the stated fixed interest rate or the variable interest rate in effect as of February 25, 2023. See "Part II—Item 8. Financial Statements and Supplementary Data—Note 7" for additional information.

(4) Represents the minimum rents payable under operating and finance leases, excluding common area maintenance, insurance or tax payments, for which we are obligated.

(5) Consists of self-insurance liabilities, which have not been reduced by insurance-related receivables, as well as payment obligations related to the Combined Plan and the UFCW National Fund. The table excludes the unfunded pension and postretirement benefit obligation of $302.6 million. The potential settlement payments related to unrecognized tax benefits have been excluded from the contractual obligations table because a reasonably reliable estimate of the timing of future tax settlements cannot be determined. Also excludes deferred tax liabilities and certain other deferred liabilities that will not be settled in cash.

(6) Purchase obligations include various obligations that have specified purchase commitments. As of February 25, 2023, future purchase obligations primarily relate to fixed asset, marketing and information technology commitments, including fixed price contracts. In addition, not included in the contractual obligations table are supply contracts to purchase product for resale to consumers which are typically of a short-term nature with limited or no purchase commitments. We also enter into supply contracts which typically include either volume commitments or fixed expiration dates, termination provisions and other customary contractual considerations. The supply contracts that are cancelable have not been included above.

Multiemployer Pension Plans

We currently contribute to 27 multiemployer plans which provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose and the respective plan trustees are responsible for determining the level of benefits to be provided to participants, the management of the plan assets and plan administration. We continue to monitor any potential exposure to underfunded multiemployer plans for our associates who are beneficiaries of these plans. The underfunding of any of these plans to which we contribute are not our liability and though we are not obligated nor the guarantor for any of the underfunding, we have estimated, based on the ratio of our contributions to the total of all contributions to these plans, our allocable share of the underfunding (the amount by which the actuarial determined plan liabilities exceed the value of the plan assets) of these multiemployer plans to which we contribute to be approximately $5.1 billion.

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 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.

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Of the 27 multiemployer plans to which we contribute, 18 plans are classified as "Critical" or "Critical and Declining" and potentially eligible for some level of relief under the special financial assistance program through the ARP Act. 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. During the second quarter of fiscal 2022, the PBGC issued the final rule with respect to the special financial assistance program which allowed for both additional funding and the investment of one third of the special financial assistance funds into return-seeking investments. Though the amount of financial assistance that each of these 18 plans could receive will vary by plan, we currently estimate that these 18 plans represent over 90% of the $5.1 billion estimated underfunding. Under the PBGC guidance, these multiemployer plans can apply for assistance based on a priority designation set by the PBGC starting in March 2023 through March 2024. We expect the special financial assistance program under these regulations to provide the funding for these plans to remain solvent for at least the next 25 to 30 years and continue to provide benefits to our associates who are beneficiaries of these multiemployer plans.

We will continue to make our contributions based on collective bargaining agreements for each of the multiemployer plans to which we contribute. Our contributions to multiemployer plans were $546.5 million, $523.7 million and $524.0 million during fiscal 2022, fiscal 2021 and fiscal 2020, respectively, and we expect to contribute approximately $570 million in fiscal 2023. Refer to "Part I—Item 1A. Risk Factors" and "Part II—Item 8. Financial Statements and Supplementary Data—Note 12" for additional information.

Guarantees

We are party to a variety of contractual agreements pursuant to which we may be obligated to indemnify the other party for certain matters. These contracts primarily relate to our commercial contracts, operating leases and other real estate contracts, trademarks, intellectual property, financial agreements and various other agreements. Under these agreements, we may provide certain routine indemnifications relating to representations and warranties (for example, ownership of assets, environmental or tax indemnifications) or personal injury matters. The terms of these indemnifications range in duration and may not be explicitly defined. We believe that if we were to incur a loss in any of these matters, the loss would not have a material effect on our financial statements.

We are liable for certain operating leases that were assigned to third parties. If any of these third parties fail to perform their obligations under the leases, we could be responsible for the lease obligation. Because of the wide dispersion among third parties and the variety of remedies available, we believe that if an assignee became insolvent it would not have a material effect on our financial condition, results of operations or cash flows.

In the ordinary course of business, we enter into various supply contracts to purchase products for resale and purchase and service contracts for fixed asset and information technology commitments. We have also entered into fixed price contracts to purchase electricity and natural gas for a portion of our energy needs. These contracts typically include volume commitments or fixed expiration dates, termination provisions and other standard contractual considerations.

Letters of Credit

We had letters of credit of $53.3 million outstanding as of February 25, 2023. The letters of credit are maintained primarily to support our performance, payment, deposit or surety obligations. We typically pay bank fees of 1.25% plus a fronting fee of 0.125% on the face amount of the letters of credit.

NEW ACCOUNTING POLICIES

See "Part II—Item 8. Financial Statements and Supplementary Data—Note 1" for new accounting pronouncements.

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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 "Part II—Item 8. Financial Statements and Supplementary Data—Note 1" for a discussion of our significant accounting policies.

Management believes the following critical accounting policies reflect its more subjective or complex judgments and estimates used in the preparation of our consolidated financial statements.

Self-Insurance Liabilities

We are primarily self-insured for workers' compensation, property, automobile and general liability. The self-insurance liability is undiscounted and determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported. We have established stop-loss amounts that limit our further exposure after a claim reaches the designated stop-loss threshold. In determining our self-insurance liabilities, we perform a continuing review of our overall position and reserving techniques. Since recorded amounts are based on estimates, the ultimate cost of all incurred claims and related expenses may be more or less than the recorded liabilities.

Any actuarial projection of self-insured losses is subject to a high degree of variability. Litigation trends, legal interpretations, benefit level changes, claim settlement patterns and similar factors influenced historical development trends that were used to determine the current year expense and, therefore, contributed to the variability in the annual expense. However, these factors are not direct inputs into the actuarial projection, and thus their individual impact cannot be quantified.

Long-Lived Asset Impairment

We regularly review our individual stores' operating performance, together with current market conditions, for indications of impairment. When events or changes in circumstances indicate that the carrying value of an individual store's assets may not be recoverable, its future undiscounted cash flows are compared to the carrying value. If the carrying value of store assets to be held and used is greater than the future undiscounted cash flows, an impairment loss is recognized to record the assets at fair value. For property and equipment held for sale, we recognize impairment charges for the excess of the carrying value plus estimated costs of disposal over the fair value. Fair values are based on discounted cash flows or current market rates. These estimates of fair value can be significantly impacted by factors such as changes in the current economic environment and real estate market conditions. Long-lived asset impairment losses were $5.1 million, $31.1 million and $30.2 million in fiscal 2022, fiscal 2021 and fiscal 2020, respectively.

Contingencies

We are involved in a number of legal proceedings and certain regulatory matters. We record a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. We also perform an assessment of the materiality of loss contingencies where a loss is either reasonably possible or it is reasonably possible that an estimated liability could materially change. If a loss or change in the estimated liability has at least a reasonable possibility of occurring and the impact on the financial statements would be material, we provide disclosure of the

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nature of the uncertainty and estimate of possible loss or range of loss to the extent such estimate can be made. We review all contingencies at least quarterly to determine whether the likelihood of loss has changed and whether a reasonable estimate of the loss can be made. The assessment of the outcome of litigation can be very difficult to predict as it is subject to legal processes that are highly complex, subject to many factors, including those that are not within our control, and highly dependent on individual facts and circumstances. While management currently believes that the estimated liabilities currently recorded are reasonable, it remains possible that differences in actual outcomes or changes in management's evaluation or predictions could arise that could be material to our financial condition, results of operations or cash flows. In addition, although we are not able to predict the outcome or reasonably estimate a range of possible losses in certain matters described in Part II—Item 8. Financial Statements and Supplementary Data—Note 14" and have not recorded an associated accrual related to these matters, an adverse judgment of negotiated settlement in these matters could be material to our financial condition, results of operations or cash flows.