[LETTERHEAD OF COVINGTON & BURLING}
November 15, 2004
By Hand Delivery and Edgar
George F. Ohsiek
Yong Kim
Robyn Manuel
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: United Natural Foods, Inc.
Forms 10-K for the fiscal year ended July 31, 2004
Filed October 14, 2004
File No. 0-21531
Dear Sir and Mesdames:
On behalf of United Natural Foods, Inc., a Delaware corporation (the
"Company"), we are responding to the staff's comment letter dated October 29,
2004. The numbered paragraphs below correspond to the comments in the staff's
letter. For the convenience of the staff we have recited each comment and
provided the response to each comment immediately thereafter.
Form 10-K for the fiscal year ended July 31, 2004
General
1. Where a comment below requests additional disclosures or other
revisions to be made, these revisions should be included in your
future filings, as applicable.
RESPONSE: We acknowledge the staff's comment and will ensure that
the additional disclosures or other revisions will be made in future
filings, as applicable.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operation
Year Ended July 31, 2004 Compared to Year Ended July 31, 2003, page
16
George F. Ohsiek
Yong Kim
Robyn Manuel
November 15, 2004
Page 2
General
2. We note that your discussion of results of operations focuses
exclusively on describing changes in the various line items on the
income statement. With a view towards enhancing disclosure, please
refer to SEC Release No. 33-8350 and Item 303(a) of Regulation S-K
and consider revising the content and focus of your MD&A such that
you identify and emphasize the key indicators of your performance.
Also consider whether there are material trends, demands,
commitments, events or uncertainties related to your financial
condition and/or operating performance that should be discussed.
RESPONSE: We acknowledge the staff's comment and will review SEC
Release No. 33-8350 and Item 303(a) of Regulation S-K in connection
with future filings in order to determine whether the content and
focus of our MD&A should be revised to enhance the Company's
disclosure of the key indicators of the Company's performance. In
addition, we will discuss any additional material trends, demands,
commitments, events or uncertainties that are reasonably likely to
have a material effect on the Company's financial condition and/or
operating performance.
3. Where you identify intermediate causes of changes in your operating
results, to the extent meaningful, also describe the reasons
underlying the intermediate causes. For example, where you identify
the cause of your organic growth in sales as resulting from growth
in your various distribution channels, please consider expanding
your discussion to describe the underlying reasons for the growth in
each of the distribution channels.
RESPONSE: We acknowledge the staff's comment and will ensure that
future filings contain enhanced descriptions, to the extent
meaningful, of the reasons for intermediate changes in the Company's
operating results.
Special Items, page 18
4. We note your presentation and discussion throughout MD&A of various
non-GAAP measures of your operating results, each measure adjusted
to exclude certain "special" items. It is unclear from your
disclosures why each of the adjustments to arrive at the non-GAAP
measure is being made and which of the adjustments, if any, are
believed to be nonrecurring in nature. Please clarify your
disclosures in future filings accordingly. Because you disclose that
these measures are presented to enhance understanding of your future
prospects, you seem to imply that all of the special items are
nonrecurring in nature. If this is the case, please tell us
George F. Ohsiek
Yong Kim
Robyn Manuel
November 15, 2004
Page 3
supplementally how each adjustment complies with the restrictions in
Item 10(e)(1)(ii)(B) of Regulation S-K regarding adjusting non-GAAP
performance measures. To the extent the adjustments are recurring in
nature, please avoid implying that they are not part of your ongoing
operations and tell us supplementally how you meet the burden of
demonstrating the usefulness of each non-GAAP measure presented.
Refer to Question 8 of our Frequently Asked Questions Regarding the
Use of Non-GAAP Financial Measures (FAQ) issued June 13, 2003
(available at www.sec.gov). If these measures are included in your
future filings, please also revise your disclosures to include all
of the information listed in the bullet points of Question 8 of the
FAQ. Show us supplementally how the revised disclosures will read in
your future filings.
RESPONSE: We acknowledge the staff's comment and will ensure that
future filings which contain a non-GAAP financial measure will
include a discussion as to why each of the adjustments used to
arrive at the non-GAAP measure is being made and which of the
adjustments are believed to be non-recurring in nature.
For the fiscal year ended July 31, 2004, the Company presented two
adjustments to arrive at the various non-GAAP measures, each of
which is non-recurring in nature.
A. Wild Oats. The first adjustment related to certain costs incurred
in transitioning the role of primary distributor for Wild Oats
Markets, Inc. ("Wild Oats") to the Company from Wild Oats' then
primary distributor, in the middle of Wild Oats' existing agreement
with this distributor. Wild Oats and that distributor had agreed to
a five year term for such relationship, but decided to terminate the
relationship in only its second year. Wild Oats then asked the
Company to resume its role as primary distributor to Wild Oats, a
role which had ended in August 2002.
Based on the new distribution agreement with Wild Oats, the Company
expects to generate sales of at least $150 million on an annual
basis (which would have represented approximately 9% of the
Company's sales for the fiscal year ended July 31, 2004). As a
result, the Company needed to hire and train additional employees
and rent extra equipment beyond existing capacity for training
purposes in order to be prepared to assume the role of primary
distributor on the dates specified in the agreement. The Company
believes these costs are non-recurring in nature and comply with the
restrictions in Item 10(e)(1)(ii)(B) of Regulation S-K regarding
adjusting non-GAAP measures for the following reasons:
George F. Ohsiek
Yong Kim
Robyn Manuel
November 15, 2004
Page 4
o The Company had not incurred a similar charge relating to a
new primary distribution arrangement in the prior two fiscal
years.
o The Company had previously incurred charges relating to the
loss of its primary distribution relationship with Wild Oats,
but, given the five year term of the distribution agreement
between Wild Oats and the other distributor, did not foresee
that charges relating to this relationship would be incurred
for at least five years, if ever.
o The Company's new agreement with Wild Oats entered into in
January 2004 is for a five year period and the Company does
not foresee any additional similar charges during that period.
o With the signing of this agreement, the Company currently
serves as the primary distributor for two of the largest
natural and organic retail markets, Whole Foods Markets, Inc,
and Wild Oats. The Company is not aware of any other existing
natural and organic retail markets that could individually
have an impact in excess of 5% on the Company's revenues. As a
result, it would be unlikely that the Company would incur
substantial additional costs to transition to the role of
primary distributor for any other customer, unless the
customer's business was concentrated within a limited
geographical area.
B. Interest Rate Swaps. The second adjustment for the fiscal year
ended July 31, 2004 related to the change in fair value of two
"ineffective" interest rate swaps through December 29, 2003. The
Company entered into interest rate swap agreements in October 1998,
August 2001 and May 2003. The October 1998 and August 2001
agreements were "ineffective" hedges in accordance with SFAS 133 as
a result of the options held by the counter parties that could have
extended the original term of the interest rate swap agreements. The
applicable accounting treatment under SFAS 133 required that the
Company record the changes in fair value of the October 1998 and
August 2001 agreements in its consolidated statement of income,
rather than within "other comprehensive income" in its statement of
stockholders' equity. The changes in fair value were dependent upon
the forward looking yield curves for each swap. The May 2003
agreement is an "effective" hedge and therefore does not require
this treatment.
As we indicated to the staff in the Company's response on August 26,
2003, the Company believes that its October 1998 and August 2001
agreements were special items that were excludable as non-recurring
George F. Ohsiek
Yong Kim
Robyn Manuel
November 15, 2004
Page 5
items. First, the Company only intends to enter into "effective"
hedges going forward. This stated intention began with the May 2003
agreement. Second, the Company believes that the October 1998 and
August 2001 agreements may have distorted and confused investors if
the change in fair value was not treated as a special item because
their inclusion directly impacted its reported earnings per share. A
change in fair value, whether positive or negative, can
significantly increase or decrease the Company's reported earnings
per share. For example, the Company recorded a positive change in
fair value for fiscal 2004 that increased its diluted earnings per
share by $0.01, and in fiscal 2003 the Company recorded a negative
change in fair value that decreased its diluted earnings per share
by $0.01. If the Company were prohibited from excluding this item as
a special item, and from presenting the related non-GAAP measures,
it would artificially inflate/decrease its reported earnings per
share and thereby mislead investors as to its results of operations
and its financial condition.
On December 29, 2003, the Company assigned and transferred all of
its obligations of its two "ineffective" interest rate swaps to a
third party at a cost of $5.4 million plus accrued interest. As a
result of this novation, these "ineffective" swaps will no longer be
included as a special item for future fiscal periods. These
"ineffective" swaps were included as a special item through the
second quarter of fiscal 2004.
Financial Statements
Consolidated Statements of Income, page 34
5. We note that depreciation expense is excluded from cost of sales.
Please update your cost of sales line item on the face of your
consolidated statements of income to indicate that cost of sales
excludes depreciation. Refer to SAB Topic 11:B. Also ensure that
your selected consolidated financial data is appropriately updated.
RESPONSE: We acknowledge the staff's comment and will ensure that
future filings contain a reference to footnotes to the financial
statements on the face of the consolidated statement of income, and
a discussion of the Company's treatment of depreciation as it
relates to the Company's operating segments within the Company's
footnotes to the consolidated financial statements. The consolidated
financial data will also be updated appropriately with the
applicable reference.
George F. Ohsiek
Yong Kim
Robyn Manuel
November 15, 2004
Page 6
Consolidated Statements of Cash Flows, page 36
6. Please consider whether it would be more appropriate to include the
line item captioned "Tax effect of stock option exercises" in the
"Changes in assets and liabilities, net of acquired companies"
section rather than in the "Adjustments to reconcile net income to
net cash provided by operating activities" section of your cash
flows from operating activities.
RESPONSE: We acknowledge the staff's comment and will ensure that
future filings reflect a change in the presentation of the
disclosure noted above.
Notes to Consolidated Financial Statements
(1) Significant Accounting Policies
General
7. Please disclose your policy for classifying shipping and handling
costs in the statement of income. If shipping costs and handling
costs are significant and are not classified in cost of sales,
disclose the amount(s) of these costs and the line item(s) that
include them. Please also disclose the line item in which you
include amounts paid to you by customers for shipping and handling.
See EITF 00-10.
RESPONSE: We acknowledge the staff's comment and will ensure that
future filings disclose the Company's policy of including shipping
and handling costs in cost of sales, in accordance with EITF 00-10.
We are supplementally advising the staff that amounts paid to the
Company by customers for shipping and handling are captured within
revenues, and not in a separate line item. Future filings will
disclose this treatment.
8. If you pay slotting fees, engage in cooperative advertising
programs, have buydown programs, or make other payments to
resellers, please disclose your accounting policy for each of these
types of arrangements, including the statement of income line item
that each type of arrangement is included in. For each expense line
item that includes these types of arrangements, please disclose the
related amounts included in that line item. For each type of
arrangement treated as an expense rather than as a reduction of
revenues, please tell us how this type of arrangement meets the
requirements in EITF 01-9. Please also discuss in MD&A any
significant estimates resulting from these arrangements.
George F. Ohsiek
Yong Kim
Robyn Manuel
November 15, 2004
Page 7
RESPONSE: We acknowledge the staff's comment and are supplementally
advising the staff that the Company does not pay slotting fees,
engage in cooperative advertising programs, have buydown programs or
make other payments to resellers. Accordingly, the requirements of
EITF 01-9 are not applicable to the Company.
9. Based on your disclosures under Item 1. Business, we understand that
you receive various discounts and advertising allowances from your
suppliers. We also note your footnote disclosure on page 37 that
"allowances" received from suppliers are recorded as reductions in
cost of sales. If, as we assume, all types of consideration received
from your suppliers in connection with the purchase or promotion of
the supplier's products, such as rebates and cooperative advertising
fees, are recorded as reductions in cost of sales, please consider
clarifying the disclosure accordingly. Otherwise, please disclose
the statements of income line item in which each of these types of
payments is included. For any amounts netted against expense line
items other than cost of sales, also disclose the amounts netted
against each expense line item for each period presented. Please
also revise your MD&A to discuss the changes in these payments
between periods and how they impacted the related statement of
income line items, if material. Refer to EITF 02-16.
RESPONSE: We acknowledge the staff's comment and will ensure that
future filings contain clarification that all types of consideration
received from suppliers in connection with the purchase or promotion
of the suppliers' products are recorded as reductions in cost of
sales in accordance with EITF 02-16. To the extent that the change
in the amounts of these types of consideration is material between
periods, future filings will contain a discussion within the gross
profit section of our MD&A.
10. We note your disclosure on page 14 of MD&A, of the types of expenses
included in the cost of sales line item and the types of expenses
included in the operating expenses line item. Please provide similar
disclosure in the notes to your financial statements, but elaborate
to specifically identify any costs of your distribution network
excluded from cost of sales. For example, indicate whether
purchasing and receiving type costs are included in cost of sales or
in operating expenses. With the exception of warehouse costs, if you
currently exclude a portion of your distribution network from cost
of sales, please also disclose:
(a) in a footnote the line item that these excluded costs are
included in and the amounts included in each line item for
each period presented; and
George F. Ohsiek
Yong Kim
Robyn Manuel
November 15, 2004
Page 8
(b) in your MD&A that your gross margins may not be comparable to
others, since some entities include all of the costs related
to their distribution network in cost of sales and others like
you exclude a portion of them from gross margin, including
them instead in a line item such as operating expenses.
RESPONSE: We acknowledge the staff's comment and will ensure that
future filings contain further disclosure as requested within MD&A
and the footnotes to the financial statements.
(n) Earnings Per Share, page 40
11. Pursuant to paragraph 53.b of SOP 93-6, please disclose your
treatment of employee stock ownership plan shares in your earnings
per share computations.
RESPONSE: We acknowledge the staff's comment and are supplementally
advising the staff that the Company does not follow SOP 93-6, but
instead has elected to continue to follow SOP 76-3, "Accounting
Practices for Certain Employee Stock Ownership Plans", as the shares
purchased by the Company's ESOP were purchased prior to December 31,
1992. We will ensure that future filings contain further
clarification of the Company's treatment of stock ownership plan
shares in accordance with SOP 76-3 in the footnote on earnings per
share computations as well as within the ESOP footnote.
(3) Stock Option Plan, page 42
12. For each of your stock option plans, please disclose the vesting
requirements and the maximum term of options granted. See paragraph
46 of SFAS 123.
RESPONSE: We acknowledge the staff's comment and will ensure that
future filings contain the disclosures referenced above.
(14) Business Segments, page 49
13. In a letter to us dated August 26, 2003 regarding your fiscal 2002
Form 10-K, you agreed to disclose in future filings the nature of
the items included in "corporate expenses" which are included as a
component of operating income in the "Other" segment. Please either
confirm you will include this disclosure in your future filings, or
otherwise tell us why you believe this disclosure is no longer
applicable.
George F. Ohsiek
Yong Kim
Robyn Manuel
November 15, 2004
Page 9
RESPONSE: We acknowledge the staff's comment and will ensure that
future filings contain a discussion of the nature of the items
included within "corporate expenses".
14. We note that you sell several types of products based on your
overview discussion in Item 1. Business. Please either revise your
filings to provide the revenue disclosures by product group
discussed in paragraph 37 of SFAS 131, or otherwise tell us why you
believe such disclosures are not applicable. In particular, it
appears that revenue disclosures for each period presented for the
following product groups may be applicable.
- Grocery and general merchandise
- Produce
- Perishables and frozen foods
- Nutritional supplements
- Bulk and food service products
- Personal care items
If you believe that other product categories are more appropriate,
please advise.
RESPONSE: We acknowledge the staff's comment and are supplementally
advising the staff that the Company does not capture its revenues
for financial reporting purposes by product groups, and therefore,
it is impracticable to report them accordingly.
14.1. Item 9A. Controls and Procedures, page 52
15. Please revise your Item 9A. disclosures as follows to comply with
Items 307 and 308(c) of Regulation S-K, as amended by SEC Release
No. 33-8238.
(a) Update your rule references to refer to Rules 13a-15(e) and
15d-15(e).
(b) Disclose the conclusions made by your Chief Executive Officer
and Chief Financial Officer regarding the effectiveness of
disclosure controls and procedures as of the end of the period
covered by the Form 10-K.
(c) Disclose any change in your internal control over financial
reporting that occurred during the last fiscal quarter that
has materially affected, or is reasonably likely to materially
affect your internal control over financial reporting.
George F. Ohsiek
Yong Kim
Robyn Manuel
November 15, 2004
Page 10
RESPONSE: We acknowledge the staff's comment and will ensure that
future filings contain (a.) updated rule references in Item 9A, (b.)
the conclusions reached by the Company's Chief Executive Officer and
Chief Financial Officer regarding the effectiveness of the Company's
disclosure controls and procedures as of the end of the period
covered and (c.) any changes in the Company's internal control over
financial reporting during the last fiscal quarter that have
materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
* * * *
Should you have any questions or comments regarding the foregoing, please
call the undersigned at (202) 662-5592.
Sincerely,
/s/ Paul V. Rogers
Paul V. Rogers
Covington & Burling