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Article by DailyStocks_admin    (10-27-08 03:47 AM)

United Natural Foods Inc. CEO STEVEN SPINNER bought 22000 shares on 10-16-2008 at $21.69

BUSINESS OVERVIEW

Overview

We are a leading national distributor of natural, organic and specialty foods and non-food products in the United States. We carry more than 60,000 high-quality natural, organic and specialty foods and non-food products, consisting of national brand, regional brand, private label and master distribution products, in six product categories: grocery and general merchandise, produce, perishables and frozen foods, nutritional supplements, bulk and food service products and personal care items. We serve more than 17,000 customers primarily located across the United States, the majority of which can be classified into one of the following categories: independently owned natural products retailers; supernatural chains, which consists of Whole Foods Market, Inc. ("Whole Foods Market"); and conventional supermarkets. Our other distribution channels include food service, international and buying clubs.

We were the first organic food distribution network in the United States designated as a "Certified Organic Distributor" by Quality Assurance International, Inc. ("QAI"). This process involved a comprehensive review by QAI of our operating and purchasing systems and procedures. This certification covers all of our broadline distribution centers, except for our specialty distribution centers.

We have been the primary distributor to Whole Foods Market, for more than 10 years. Our relationship with Whole Foods Market was expanded to cover the former Wild Oats Markets, Inc. ("Wild Oats Market") stores retained by Whole Foods Market following Whole Foods Market's merger with Wild Oats Markets in August 2007. We had served as the primary distributor of natural and organic foods and non-food products to Wild Oats Market prior to the merger. The Henry's and Sun Harvest stores divested by Whole Foods Market, and acquired by a subsidiary of Smart & Final, Inc., remain our customers.

On November 2, 2007, we acquired Distribution Holdings, Inc. ("DHI") and its wholly-owned subsidiary Millbrook Distribution Services, Inc. ("Millbrook"), which we now refer to as UNFI Specialty Distribution. Through UNFI Specialty Distribution, we distribute specialty food items (including ethnic, kosher, gourmet, organic and natural foods), health and beauty care items and other non-food items to more than 9,000 retail locations. We believe that the acquisition of DHI and Millbrook accomplishes certain of our strategic objectives, including accelerating our expansion into a number of high-growth business segments and establishing immediate market share in the fast-growing specialty foods market. We believe that UNFI Specialty Distribution's customer base enhances our conventional supermarket business channel and that the organizations' complementary product lines present opportunities for cross-selling. See "—Our Operating Structure—Wholesale Division" for further information regarding this acquisition and our new specialty distribution business.

In recent years, our sales to existing and new customers have increased through the continued growth of the natural products industry in general, increased market share as a result of our high-quality service and broader product selection, the acquisition of, or merger with, natural and specialty products distributors, the expansion of our existing distribution centers, the construction of new distribution centers and the development of our own line of natural and organic branded products. Through these efforts, we believe that we have been able to broaden our geographic penetration, expand our customer base, enhance and diversify our product selections and increase our market share. We also own and operate 13 natural products retail stores, located primarily in Florida (with two locations in Maryland and one in Massachusetts), through our subsidiary, Natural Retail Group, Inc. ("NRG"). We believe that our retail business serves as a natural complement to our distribution business because it enables us to develop new marketing programs and improve customer service. In

addition, our subsidiary Hershey Imports Company, Inc. ("Hershey Imports") specializes in the international importation, roasting and packaging of nuts, seeds, dried fruits and snack items.

We are a Delaware corporation based in Dayville, Connecticut and we conduct business through our various wholly owned subsidiaries. We operated twenty distribution centers at 2008 fiscal year end. We believe that our distribution centers provide us with the largest capacity of any distributor in the natural, organic and specialty products industry. In the past six years, we have invested over $175 million in distribution capacity and infrastructure improvements. We have increased our distribution capacity to approximately 5.8 million square feet.

Unless otherwise specified, references to "United Natural Foods," "we," "us," "our" or "the Company" in this Annual Report on Form 10-K include our consolidated subsidiaries. We operate in one reportable segment, the wholesale segment. See the financial statements and notes thereto included in "Item 8. Financial Statements and Supplementary Data" of this Report for information regarding our financial performance.

The Natural Products Industry

The natural products industry encompasses a wide range of products in addition to food products (including organic foods). These other product categories include nutritional, herbal and sports supplements; toiletries and personal care items; naturally-based cosmetics; natural/homeopathic medicines; pet products and cleaning agents. According to the June 2008 issue of The Natural Foods Merchandiser , a leading trade publication for the natural products industry, sales revenues for all types of natural products rose to $62.4 billion in 2007, an increase of approximately 9.8% over 2006. According to The Natural Foods Merchandiser , this increase in sales, from a total dollar perspective, was driven primarily by growth in the following categories:

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personal care products;

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packaged grocery;

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fresh produce;

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dairy products; and

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pet products.

The fastest growing categories, although not necessarily the largest dollar volume categories, in the natural products industry were pet products, housewares, books, fresh meat/seafood and beer/wine.

According to The Natural Foods Merchandiser , the continuing growth trend is driven by consumer demand for a healthy lifestyle, food safety concerns and concerns about sustainability. More than half of American households represent "mid-level" organic customers; that is, they regularly purchase organic and natural products and want to learn more about nutrition as concerns about health claims, food safety, irradiation and genetically modified organisms continue to mount.

Our Operating Structure

Our operations are comprised of three principal operating divisions. These operating divisions are:

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our wholesale division, which includes our broadline distribution business; our specialty distribution business; Albert's Organics, Inc. ("Albert's"), a distributor of organically grown produce and perishable items; and Select Nutrition, which distributes vitamins, minerals and supplements;

•
our retail division, consisting of NRG, which operates our 13 retail stores; and


•
our manufacturing division, which is comprised of Hershey Imports, one of the leading importers, processors, packagers, and wholesale distributors of nuts, dried fruit, seeds, trail mixes, natural and organic products, and confections in the United States, and our branded product lines.

Wholesale Division

Our broadline distribution business is organized into two regions—our Eastern Region and our Western Region. We distribute natural and organic products in all of our product categories to customers in the Eastern and Midwestern portions of the United States through our Eastern Region and to customers in the western and central portions of the United States through our Western Region. Seven of our twenty distribution centers at 2008 fiscal year end, which provide approximately 2.6 million square feet of warehouse space, were operated in our Eastern Region, and five of our distribution centers, which provide approximately 1.5 million square feet of warehouse space, were operated in our Western Region.

We acquired our specialty distribution business through our acquisition of DHI and Millbrook on November 2, 2007. Our UNFI Specialty Distribution division operates distribution centers located in Massachusetts, New Jersey, and Arkansas, with customers throughout the United States. Through our specialty distribution division's three distribution centers, which provide approximately 1.6 million square feet of warehouse space, we distribute specialty food items (including ethnic, kosher, gourmet, organic and natural foods), health and beauty care items and other non-food items.

Through Albert's, we distribute organically grown produce and non-produce perishables, such as organic milk, dressings, eggs, juices, poultry and various other refrigerated specialty items. Albert's operates out of six distribution centers strategically located in all regions of the United States, and is designated as a "Certified Organic Distributor" by QAI.

Through Select Nutrition, we distribute more than 14,000 health and beauty aids, vitamins, minerals and supplements from distribution centers in California and Pennsylvania.

Certain of our distribution centers are shared by multiple operations in our wholesale division.

Retail Division

We own and operate 13 natural products retail stores, located primarily in Florida (with two locations in Maryland and one in Massachusetts), through NRG. We believe that our retail business serves as a natural complement to our distribution business because it enables us to develop new marketing programs and improve customer service.

We believe our retail stores have a number of advantages over their competitors, including our financial strength and marketing expertise, the purchasing power resulting from group purchasing by stores within NRG and the breadth of our product selection.

We believe that we benefit from certain advantages in acting as a distributor to our retail stores, including our ability to:

•
control the purchases made by these stores;

•
expand the number of high-growth, high-margin product categories, such as produce and prepared foods, within these stores; and

•
keep current with the demands of and trends in the retail marketplace, which enables us to better anticipate and serve the needs of our wholesale customers.

Additionally, as the primary natural products distributor to our retail locations, we realize significant economies of scale and operating and buying efficiencies. As an operator of retail stores, we

also have the ability to test market select products prior to offering them nationally. We can then evaluate consumer reaction to the product without incurring significant inventory risk. We also are able to test new marketing and promotional programs within our stores prior to offering them to our broader customer base.

Manufacturing Division

Our subsidiary Hershey Imports specializes in the international importation, roasting and packaging of nuts, seeds, dried fruits and snack items. We sell these items in bulk in our own packaged snack lines, EXPRESSnacks, Woodfield Farms and Woodstock Farms, and through private label packaging arrangements we have established with large health food, supermarket and convenience store chains. We operate our manufacturing operations out of packaging, roasting, and processing facilities in New Jersey and a warehouse in Los Angeles, California.

Our branded product lines address certain needs or preferences of customers of our wholesale division, which are not otherwise being met by other suppliers. We carry over 20 brand names, representing over 700 unique products.

Our Competitive Advantages

We believe that we benefit from a number of significant competitive advantages, including the following.

We are a market leader with a nationwide presence.

We are one of the few distributors capable of serving local and regional customers as well as the rapidly growing national supernatural and supermarket chains. We believe we have significant advantages over smaller, regional natural, organic and specialty products distributors as a result of our ability to:

•
expand marketing and customer service programs across regions;

•
expand national purchasing opportunities;

•
offer a broader product selection;

•
consolidate systems applications among physical locations and regions;

•
invest in people, facilities, equipment and technology; and

•
reduce geographic overlap between regions.

We are an efficient distributor.

In addition to our volume purchasing opportunities, a critical component of being an efficient distributor is our management of warehouse and distribution costs. Our continued growth has created the need to expand our existing facilities and open new facilities to achieve maximum operating efficiencies, including by reducing fuel and other transportation costs, and to assure adequate space for future needs. We have made significant capital expenditures and have incurred considerable expenses in connection with the opening and expansion of distribution facilities, and we expect to continue to do so. In August 2005, we expanded our Midwest operations by opening a 311,000 square foot distribution center in Greenwood, Indiana, which serves as a distribution hub for our customers in Illinois, Indiana, Ohio and other Midwest states. In October 2005, we opened our Rocklin, California distribution center and moved our Auburn, California operations to this facility. The Rocklin distribution center is 487,000 square feet in size and serves as a distribution hub for customers in California and surrounding states. Our new 237,000 square foot distribution center in Ridgefield, Washington commenced operations in

December 2007 and serves as a regional distribution hub for customers in Portland, Oregon and other Northwest markets. We opened our Sarasota, Florida warehouse in the first quarter of fiscal 2008 in order to reduce the geographic area served by our Atlanta, Georgia facility. Our new, 613,000 square foot distribution center in Moreno Valley, California commenced operations in September 2008 and serves our customers in Southern California, Arizona, Southern Nevada, Southern Utah, and Hawaii. Finally, in April 2008, we announced plans to lease a new 675,000 square foot distribution center in York, Pennsylvania to serve our customers in New York, New Jersey, Pennsylvania, Delaware, Maryland, Ohio, Virginia and West Virginia. Operations are scheduled to commence in January 2009.

We have extensive and long-standing customer relationships and provide superior service.

We serve more than 17,000 customers primarily located across the United States. We have developed long-standing customer relationships, which we believe are among the strongest in our industry. In particular, we have been the primary supplier of natural and organic products to the largest supernatural chain in the United States, Whole Foods Market, for more than ten years.

Our average distribution service level for fiscal 2008 was approximately 97%, which we believe is the highest in our industry. Distribution service levels refer to the percentage of items ordered by customers that are delivered by the requested delivery date, excluding manufacturers' "out of stocks." We believe that our high distribution service levels are attributable to our experienced purchasing departments and sophisticated warehousing, inventory control and distribution systems. We offer next-day delivery service to a majority of our active customers and offer multiple deliveries each week to our largest customers. We believe that customer loyalty is dependent upon excellent customer service, including accurate fulfillment of orders, timely product delivery, low prices and a high level of product marketing support.

We have an experienced management team and our employees are incentivized to perform through equity ownership.

Our management team has extensive experience in the natural and specialty products industries and has been successful in identifying, consummating and integrating multiple acquisitions. Since 2000, we have successfully completed seven acquisitions of distributors, manufacturers and suppliers, two acquisitions of retail stores and eight acquisitions of branded product lines. In addition, our executive officers and directors, and our Employee Stock Ownership Trust, beneficially own in the aggregate approximately 6.7% of our common stock. Accordingly, our senior management and employees have a significant incentive to continue to generate strong growth in operating results in the future.

Our Growth Strategy

Our growth strategy is to maintain and enhance our position as a leading national distributor to the natural and organic industry and to increase our market share in the specialty products industry. Since our formation, we have grown our business through the acquisition of a number of distributors and suppliers, which has expanded our distribution network, product selection and customer base. For example, we acquired our Albert's, NRG and Hershey Imports businesses and, during fiscal 2008, we acquired DHI and Millbrook, which comprise our specialty distribution business, and three branded product lines.

To implement our growth strategy, we intend to continue to increase our leading market share of the growing natural and organic products industry by expanding our customer base, increasing our share of existing customers' business and continuing to expand and further penetrate new distribution territories, particularly in the Mid-Atlantic, Southern Pennsylvania and South Central United States markets. We plan to expand out presence within the specialty industry by offering new and existing customers a single wholesale distributor capable of meeting their specialty, natural and organic product needs on a national or regional basis. Key elements of our strategy include:

Expanding Our Customer Base

As of August 2, 2008, we served more than 17,000 customers primarily located throughout the United States. We plan to continue expanding our coverage of the highly fragmented natural and organic products industry by cultivating new customer relationships within the industry and by further developing other channels of distribution, such as traditional supermarkets, mass market outlets, institutional food service providers, international, buying clubs, hotels and gourmet stores.

Increasing Our Market Share of Existing Customers' Business

We believe that we are the primary distributor of natural and organic products to the majority of our natural products customer base, including to Whole Foods Market, our largest customer. We intend to maintain our position as the primary supplier for a majority of our customers, and add to the number of customers to which we serve as primary supplier, by offering the broadest product selection in our industry at competitive prices. With the acquisition of UNFI Specialty Distribution, we further believe that we have the ability to meet our customers' needs for specialty foods and products as well as certain general merchandise. We believe this represents an opportunity to accelerate our sales growth within the supermarket channel and potentially our supernatural and independent channels.

Continuing to Expand Our Branded Products Business

We have launched a number of private label or branded product lines in order to provide our customers with a broader selection of product offerings. In fiscal 2008, our branded product revenues were approximately 3.3% of our overall net sales. We plan to increase our branded product business through organic growth and through brand acquisitions. We believe this initiative differentiates us from other distributors within our industry, enables us to build long-term brand equity for the Company and allows us to generate higher gross margins, as branded product revenues generally yield higher margins than do third party branded product revenues.

Expanding into Other Distribution Channels

We believe that we will be successful in expanding into the food service channel as well as further enhancing our presence in the international channel. We will continue to develop regional relationships and alliances with companies such as Aramark Corporation, the Compass Group North America, and Sodexho Inc. in the food service channel and seek other alliances in the international channel.

Continuing to Expand into and Penetrate New Regions of Distribution and Improve the Efficiency of Our Nationwide Distribution Network

As discussed under "—Our Competitive Advantages" above, we have made significant capital expenditures and incurred considerable expenses in connection with the construction of new or the expansion of existing distribution facilities. We will continue to selectively evaluate opportunities to build new facilities or to acquire distributors to better serve existing markets and expand into new markets. Further, we will maintain our focus on integrating these new or acquired facilities into our nationwide distribution network in order to improve our economies of scale in purchasing, warehousing, transportation and general and administrative functions, which we believe will lead to continued improvements in our operating margin.

Continuing to Provide the Leading Distribution Solution

We believe that we provide the leading distribution solution to the natural, organic and specialty products industry through our national presence, regional responsiveness, focus on customer service and breadth of product offerings. Our service levels, which we believe to be the highest in our industry, are attributable to our experienced purchasing departments and our sophisticated warehousing, inventory control and distribution systems. See "—Our Focus on Technology" below for more information regarding our use of technology in our warehousing, inventory control and distribution systems.

Among the benefits we provide to our customers is access, at preferred rates and terms, to the suite of products developed by Living Naturally, LLC, a leading provider of marketing promotion and electronic ordering systems to the natural and organic products industry. We have maintained a strategic alliance with Living Naturally since 2002. The products provided by Living Naturally include an intelligent electronic ordering system and turnkey retailer website services, which create new opportunities for our retailers to increase their inventory turns, reduce their costs and enhance their profits. We also offer our customers a selection of inventory management, merchandising, marketing, promotional and event management services designed to increase sales and enhance customer satisfaction. These marketing services, which primarily are utilized by customers in our independently owned natural products retailers channel and many of which are co-sponsored with suppliers, include monthly and thematic circular programs, in-store signage and assistance in product display.

Our Customers

We maintain long-standing customer relationships with independently-owned natural products retailers, supernatural chains and supermarket chains. In addition, we emphasize our relationships with new customers, such as national conventional supermarkets, mass market outlets and gourmet stores, which are continually increasing their natural product offerings. The following were included among our wholesale customers for fiscal 2008:

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Whole Foods Market, the largest supernatural chain in the United States;

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conventional supermarket chains, including Kroger, Wegman's, Haggen's, Stop and Shop, Giant, Peapod, Quality Food Centers, Hannaford, Food Lion, Bashas', Lunds, Byerly's, Rainbow, Lowe's, Publix, Fred Meyer and United Supermarkets; and

•
mass market chains, including BJ's Wholesale Club and Costco.

On a combined basis and excluding sales to Henry's and Sun Harvest store locations (which remain our customers), Whole Foods Market and Wild Oats Markets accounted for approximately 31.0% of our net sales in fiscal 2008. In October 2006, we announced a seven-year distribution agreement with Whole Foods Market, which commenced on September 26, 2006, under which we serve as the primary U.S. distributor to Whole Foods Market in the regions where we previously served. In January 2007, we expanded our Whole Foods Market relationship in the Southern Pacific region of the United States. Our relationship with Whole Foods Market was further expanded in August 2007, when Whole Foods Market completed its merger with Wild Oats Markets. We had served as the primary distributor of natural and organic foods and non-food products to Wild Oats Markets prior to the merger, and we continue to serve the former Wild Oats Markets stores retained by Whole Foods Market under our distribution arrangement with Whole Foods Market. We also continue to serve as a primary distributor to the Henry's and Sun Harvest store locations previously owned by Wild Oats Markets and sold by Whole Foods Market to a subsidiary of Smart & Final Inc. on September 30, 2007.

Sales to Henry's and Sun Harvest store locations have been reclassified from our supernatural channel into our supermarket channel in both fiscal years 2008 and 2007 and will continue in this classification going forward. This reclassification resulted in an increase in sales in the supermarket channel of 1.7% and a decrease in sales in the supernatural channel of 1.7% for the year ended July 28, 2007. In addition, sales by channel have been adjusted to reflect changes in customer types resulting from a review of our customer lists. As a result of this adjustment, sales to the independents sales channel increased 0.9% for the year ended July 28, 2007 and sales to the supermarket sales channel decreased 0.9% for the year ended July 28, 2007.

We distribute natural, organic and specialty foods and non-food products to customers internationally, as well as to customers located in the United States. Our sales to international customers represent a de minimis portion of our business.

Our Marketing Services

We have developed a variety of supplier-sponsored marketing services, which cater to a broad range of retail formats. These programs are designed to educate consumers, profile suppliers and increase sales for retailers, many of which do not have the resources necessary to conduct such marketing programs independently

Our marketing programs include:

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multiple, monthly, region-specific, consumer circular programs, which feature the logo and address of the participating retailer imprinted on a circular that advertises products sold by the retailer to its customers. The monthly circular programs are structured to pass through to the retailer the benefit of our negotiated discounts and advertising allowances, and also provide retailers with posters, window banners and shelf tags to coincide with each month's promotions;

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our supplier-focused Most Valued Partner program, which we believe helps build incremental, mutually profitable sales for suppliers and us, while fostering a sense of partnership;

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other retailer initiative programs, such as a coupon booklet and separate supplement and personal care product-themed sales and educational brochures we offer to independent retailers, which allow us to explore new marketing avenues;

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an information-sharing program that helps our suppliers better understand our customers' businesses, in order to generate mutually beneficial incremental sales in an efficient manner; and

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a truck advertising program that allows our suppliers to purchase ad space on the sides of our hundreds of trailers nationally, which we believe increases their potential consumer ad impressions;


We keep current with the latest trends in the industry. Periodically, we conduct focus group sessions with certain key retailers and suppliers in order to ascertain their needs and allow us to better service them. We also:

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offer in-store signage and promotional materials, including shopping bags and end-cap displays;

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provide assistance with planning and setting up product displays;

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provide shelf tags for products;

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provide assistance with store layout designs;

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provide product data information such as best seller lists, store usage reports and easy-to-use product catalogs; and

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maintain a website on which retailers can access various individual retailer-specific reports and product information.


CEO BACKGROUND

Richard Antonelli has served as a member of the Board of Directors since December 2003, as our Executive Vice President and Chief Operating Officer since December 2005, and as President of United Distribution since October 2004. Mr. Antonelli served as President of our Western Region from January 2004 to October 2004, and as President of our Eastern Region from September 2002 to December 2003. Mr. Antonelli served as president of Fairfield Farm Kitchens, a Massachusetts-based custom food manufacturer, from August 2001 until August 2002. Mr. Antonelli served as our Director of Sales from April 1985 until July 2001.

Gordon D. Barker has served as a member of our Board of Directors since September 1999. Mr. Barker serves as the Chair of the Compensation Committee and as a member of the Audit Committee and the Nominating and Governance Committee. Mr. Barker has served as a contract Chief Executive Officer for QVL Pharmacy, a privately-held entity, since January 2005. Mr. Barker has served as President of Barker Holdings, LLC since January 2004. Mr. Barker served as Chief Executive Officer of Snyder's Drug Stores, Inc. from October 1999 to March 2004. Snyder's Drug Stores, Inc. filed for Chapter 11 bankruptcy in September 2003. Snyder's emerged from this filing in March 2004. Mr. Barker has served as the principal of Barker Enterprises, an investment and consultant firm, since January 1997. Mr. Barker is a nominee to serve as a Class II director.

Joseph M. Cianciolo has served as a member of our Board of Directors since September 1999. Mr. Cianciolo serves as Chair of the Audit Committee and as a member of the Nominating and Governance Committee and Finance Committee. Mr. Cianciolo served as the Managing Partner of KPMG LLP, Providence, Rhode Island office, from June 1990 until June 1999. Mr. Cianciolo also serves on the Board of Directors of Nortek, Inc. and Eagle Bulk Shipping, Inc.

Michael S. Funk has served as a member of our Board of Directors since February 1996 and as our President and Chief Executive Officer since October 2005. Mr. Funk serves as a member of the Finance Committee. Mr. Funk served as Chair of our Board of Directors from January 2003 to December 2003, as Vice Chair of our Board of Directors from February 1996 until December 2002, as our Chief Executive Officer from December 1999 until December 2002 and as our President from October 1996 until December 1999. Since its inception in July 1976 until April 2001, Mr. Funk served as President of Mountain People's Warehouse, Inc., one of our wholly-owned subsidiaries.

Gail A. Graham has served as a member of our Board of Directors since October 2002. Ms. Graham serves as a member of the Audit Committee, the Nominating and Governance Committee and the Compensation Committee. Ms. Graham has served as the General Manager of Mississippi Market Natural Foods Cooperative, a consumer owned and controlled cooperative in St. Paul, Minnesota, since October 1999. Ms. Graham served as Vice Chair of the Board of Directors of Blooming Prairie Cooperative Warehouse from November 1994 until October 1998 and from November 2000 until October 2002. Ms. Graham served as the Chair of the Board of Directors of Blooming Prairie Cooperative Warehouse from November 1998 until October 2000. Ms. Graham resigned from the Board of Directors of Blooming Prairie Cooperative Warehouse in October 2002, concurrent with our purchase of the cooperative and her appointment to our Board of Directors. Ms. Graham is a nominee to serve as a Class II director.

James P. Heffernan has served as a member of our Board of Directors since March 2000. Mr. Heffernan serves as Chair of the Finance Committee and as a member of the Audit Committee and the Compensation Committee. Mr. Heffernan has served as a Trustee for the New York Racing Association since November 1998. Mr. Heffernan served as a member of the Board of Directors of Columbia Gas System, Inc. from January 1993 until November 2000.

Peter Roy has served as a member of our Board of Directors since June 2007. Mr. Roy is a member of the Compensation Committee and the Finance Committee. Mr. Roy is an entrepreneur and since 1999 has been a strategic advisor to North Castle Partners. In connection with his role as a strategic advisor to North Castle Partners, Mr. Roy served on the boards of Avalon Natural Products and Naked Juice Company. Additionally, Mr. Roy currently serves on the board of directors of West Marine. From 1993 to 1998, Mr. Roy served as President of Whole Foods Market, Inc and, for five years prior to that, served as President of that company's West Coast Region.

Thomas B. Simone has served as the Chair of the Board of Directors since December 2005 and as Lead Independent Director since December 2003. Mr. Simone served as the Vice Chair of the Board of Directors from January 2003 to December 2005, as the Chair of the Board of Directors from December 1999 to December 2002 and as a member of the Board of Directors since October 1996. Mr. Simone is the Chair of the Nominating and Governance Committee and is a member of the Compensation Committee and the Finance Committee. Mr. Simone has served as Chairman, President and Chief Executive Officer of Simone & Associates, LLC and its predecessor company, each a natural and organic products and healthcare investment and consulting company, since April 1994. Mr. Simone is a nominee to serve as a Class II director.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

We are a leading national distributor of natural, organic and specialty foods and non-food products in the United States. We carry more than 60,000 high-quality natural, organic and specialty foods and non-food products, consisting of national brand, regional brand, private label and master distribution products, in six product categories: grocery and general merchandise, produce, perishables and frozen foods, nutritional supplements, bulk and food service products and personal care items. We serve more than 17,000 customers primarily located across the United States, the majority of which can be classified into one of the following categories: independently owned natural products retailers; supernatural chains, which are comprised of large chains of natural foods supermarkets; and conventional supermarkets. Our other distribution channels include food service, international and buying clubs.

Our operations are comprised of three principal operating divisions. These operating divisions are:

•
our wholesale division, which includes our broadline natural and organic distribution business, our specialty distribution business, Albert's, which is a leading distributor of organically grown produce and perishable items, and Select Nutrition, which distributes vitamins, minerals and supplements;

•
our retail division, consisting of NRG, which operates our 13 natural products retail stores; and

•
our manufacturing division, which is comprised of Hershey Imports, which specializes in the international importation, roasting and packaging of nuts, dried fruit, seeds, trail mixes, natural and organic products, and confections, and our branded product lines.

In recent years, our sales to existing and new customers have increased through the continued growth of the natural and organic products industry in general; increased market share through our high quality service and a broader product selection, and the acquisition of, or merger with, natural and specialty products distributors; the expansion of our existing distribution centers; the construction of new distribution centers; and the development of our own line of natural and organic branded products. Through these efforts, we believe that we have been able to broaden our geographic penetration, expand our customer base, enhance and diversify our product selections and increase our market share.

We have been the primary distributor to Whole Foods Market, our largest customer, for more than 10 years. In August 2007, Whole Foods Market and Wild Oats Markets completed their merger, as a result of which, Wild Oats Markets became a wholly-owned subsidiary of Whole Foods Market. We had served as the primary distributor of natural and organic foods and non-food products for Wild Oats Markets prior to the merger, and our relationship with Whole Foods Market expanded to cover the former Wild Oats Markets stores retained by Whole Foods Market following the merger. On a combined basis, and excluding sales to Wild Oats Markets' former Henry's and Sun Harvest store locations (which were sold by Whole Foods Market to a subsidiary of Smart & Final Inc. on September 30, 2007), Whole Foods Market and Wild Oats Markets accounted for approximately 31.0% and 34.7% of our net sales for the years ended August 2, 2008 and July 28, 2007, respectively.

On November 2, 2007, we acquired DHI and Millbrook for total cash consideration of $85.5 million, consisting of the $84.0 million purchase price and $1.5 million of related transaction fees, subject to certain adjustments set forth in the merger agreement. Our UNFI Specialty Distribution division is comprised of DHI and Millbrook. Our specialty distribution division operates distribution centers located in Massachusetts, New Jersey, and Arkansas, with customers throughout the United States. Through our specialty distribution division's three distribution centers, which provide approximately 1.6 million square feet of warehouse space, we distribute specialty food items (including ethnic, kosher, gourmet, organic and natural foods), health and beauty care items and other non-food items.

We believe that the acquisition of DHI and Millbrook accomplishes several of our strategic objectives, including accelerating our expansion into a number of high-growth business segments and establishing immediate market share in the fast-growing specialty foods market. We believe that Millbrook's customer base enhances our conventional supermarket business channel and that the organizations' complementary product lines present opportunities for cross-selling.

In order to maintain our market leadership and improve our operating efficiencies, we seek to continually:

•
expand our marketing and customer service programs across regions;

•
expand our national purchasing opportunities;

•
offer a broader product selection;

•
consolidate systems applications among physical locations and regions;

•
increase our investment in people, facilities, equipment and technology;

•
integrate administrative and accounting functions; and

•
reduce geographic overlap between regions.



Our continued growth has created the need for expansion of existing facilities to achieve maximum operating efficiencies and to assure adequate space for future needs. We have made significant capital expenditures and incurred considerable expenses in connection with the opening and expansion of our facilities, and we expect to continue to do so. In the past six years, we have invested over $175 million in distribution capacity and infrastructure improvements. We have increased our distribution capacity to approximately 5.8 million square feet. In August 2005, we expanded our Midwest operations by opening a 311,000 square foot distribution center in Greenwood, Indiana, which serves as a distribution hub for our customers in Illinois, Indiana, Ohio and other Midwest states. In October 2005, we opened our Rocklin, California distribution center and moved our Auburn, California operations to this facility. The Rocklin distribution center is 487,000 square feet in size and serves as a distribution hub for customers in California and surrounding states. Our new 237,000 square foot distribution center in Ridgefield, Washington commenced operations in December 2007 and serves as a regional distribution hub for customers in Portland, Oregon and other Northwest markets. We opened our Sarasota, Florida warehouse in the first quarter of fiscal 2008 in order to reduce the geographic area served by our Atlanta, Georgia facility, which we believe will contribute to lower transportation costs. Our new, 613,000 square foot distribution center in Moreno Valley, California commenced operations in September 2008 and serves our customers in Southern California, Arizona, Southern Nevada, Southern Utah, and Hawaii. Finally, in April 2008, we announced plans to lease a new 675,000 square foot distribution center in York, Pennsylvania to serve our customers in New York, New Jersey, Pennsylvania, Delaware, Maryland, Ohio, Virginia and West Virginia. Operations are scheduled to commence in January 2009.

Our net sales consist primarily of sales of natural, organic and specialty products to retailers, adjusted for customer volume discounts, returns and allowances. Net sales also consist of amounts charged by us to customers for shipping and handling and fuel surcharges. The principal components of our cost of sales include the amounts paid to manufacturers and growers for product sold, plus the cost of transportation necessary to bring the product to our distribution facilities. Cost of sales also includes amounts incurred by us at our manufacturing subsidiary, Hershey Imports, for inbound transportation costs and depreciation for manufacturing equipment and consideration received from suppliers in connection with the purchase or promotion of the suppliers' products. Our gross margin may not be comparable to other similar companies within our industry that may include all costs related to their distribution network in their costs of sales rather than as operating expenses. We include purchasing and outbound transportation expenses within our operating expenses rather than in our cost of sales. Total operating expenses include salaries and wages, employee benefits (including payments under our Employee Stock Ownership Plan), warehousing and delivery, selling, occupancy, insurance, administrative, share-based compensation, depreciation and amortization expense. Other expenses (income) include interest on our outstanding indebtedness, interest income and miscellaneous income and expenses.

Critical Accounting Policies

The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Securities and Exchange Commission has defined critical accounting policies as those that are both most important to the portrayal of our financial condition and results and require our most difficult, complex or subjective judgments or estimates. Based on this definition, we believe our critical accounting policies are: (i) determining our allowance for doubtful accounts, (ii) determining our reserves for the self-insured portions of our workers' compensation and automobile liabilities and (iii) valuing goodwill and intangible assets. For all financial statement periods presented, there have been no material modifications to the application of these critical accounting policies.

Allowance for doubtful accounts

We analyze customer creditworthiness, accounts receivable balances, payment history, payment terms and historical bad debt levels when evaluating the adequacy of our allowance for doubtful accounts. In instances where a reserve has been recorded for a particular customer, future sales to the customer are conducted using either cash-on-delivery terms, or the account is closely monitored so that as agreed upon payments are received, orders are released; a failure to pay results in held or cancelled orders. Our accounts receivable balance was $179.1 million and $160.3 million, net of the allowance for doubtful accounts of $5.5 million and $4.4 million, as of August 2, 2008 and July 28, 2007, respectively. Our notes receivable balances were $3.8 million and $4.5 million, net of the allowance of doubtful accounts of $1.6 million and $1.6 million, as of August 2, 2008 and July 28, 2007, respectively.

Insurance reserves

It is our policy to record the self-insured portions of our workers' compensation and automobile liabilities based upon actuarial methods of estimating the future cost of claims and related expenses that have been reported but not settled, and that have been incurred but not yet reported. Any projection of losses concerning workers' compensation and automobile liability is subject to a considerable degree of variability. Among the causes of this variability are unpredictable external factors affecting litigation trends, benefit level changes and claim settlement patterns. If actual claims incurred are greater than those anticipated, our reserves may be insufficient and additional costs could be recorded in our consolidated financial statements. Accruals for workers' compensation and automobile liabilities totaled $12.5 million and $8.5 million as of August 2, 2008 and July 28, 2007, respectively.

Valuation of goodwill and intangible assets

Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," requires that companies test goodwill for impairment at least annually and between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We have elected to perform our annual tests for indications of goodwill impairment during the fourth quarter of each year. Impairment losses are determined based upon the excess of carrying amounts over discounted expected future cash flows of the underlying business. For reporting units that indicate potential impairment, we determine the implied fair value of that reporting unit using a discounted cash flow analysis and compare such values to the respective reporting units' carrying amounts. As of August 2, 2008, our annual assessment of each of our reporting units indicated that no impairment of goodwill existed. Total goodwill as of August 2, 2008 and July 28, 2007 was $170.6 million and $79.9 million, respectively.

Intangible assets with indefinite lives are tested for impairment at least annually and between annual tests if events occur or circumstances change that would indicate that the value of the asset may be impaired. Impairment is measured as the difference between the fair value of the asset and its carrying value. There was no impairment to our indefinite lived intangible assets during 2008. Total indefinite lived intangible assets as of August 2, 2008 and July 28, 2007 were $25.9 million and $8.3 million, respectively.

Intangible assets with finite lives are tested for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Cash flows expected to be generated by the related assets are estimated over the asset's useful life based on updated projections. If the evaluation indicates that the carrying amount of the asset may not be recoverable, the potential impairment is measured based on a projected discounted cash flow model. There were no indicators of impairment during 2008. Total finite-lived intangible assets as of August 2, 2008 and July 28, 2007 were $7.8 million and $0.3 million, respectively.

The assessment of the recoverability of goodwill and intangible assets will be impacted if estimated future cash flows are not achieved.

Results of Operations

Year ended August 2, 2008 compared to year ended July 28, 2007

Net Sales

Our net sales increased approximately 22.2%, or $611.6 million, to $3.4 billion for the year ended August 2, 2008, from $2.8 billion for the year ended July 28, 2007. This increase was primarily due to sales from our newly acquired UNFI Specialty Distribution business of $211.4 million as well as organic growth (sales growth excluding the impact of acquisitions) in our wholesale distribution division of $389.1 million, or 14.4%. Further, approximately 2% of the increase in net sales was attributable to the extra week included in fiscal 2008. Our organic growth is due to the continued growth of the natural products industry in general, increased market share as a result of our focus on service and added value services, and the opening of new, and expansion of existing, distribution centers, which allow us to carry a broader selection of products. In addition to net sales growth attributable to UNFI Specialty Distribution and our organic growth, we also benefited from the inclusion of sales of products we acquired from Organic Brands, LLC ("Organic Brands") and acquisitions of and other branded product lines during fiscal 2007 and fiscal 2008. However, these acquisitions impacted our cost of sales and gross profit more than they impacted our net sales.

On a combined basis, and excluding sales to Henry's and Sun Harvest store locations, which were divested by Whole Foods Market following its merger with Wild Oats Markets, Whole Foods Market and Wild Oats Markets accounted for approximately 31.0% and 34.7% of our net sales for the years

ended August 2, 2008 and July 28, 2007, respectively. The Henry's and Sun Harvest locations divested by Whole Foods Market remain our customers.

Sales to Henry's and Sun Harvest store locations have been reclassified from our supernatural channel into our supermarket channel in both fiscal years 2008 and 2007 and will continue in this classification going forward. This reclassification resulted in an increase in sales in the supermarket channel of 1.7% and a decrease in sales in the supernatural channel of 1.7% for the year ended July 28, 2007. In addition, sales by channel have been adjusted to reflect changes in customer types resulting from a review of our customer lists. As a result of this adjustment, sales to the independents sales channel increased 0.9% for the year ended July 28, 2007 and sales to the supermarket sales channel decreased 0.9% for the year ended July 28, 2007. The overall decrease in sales to the independents and supernatural channels and the increase in sales to the supermarket channel was primarily due to the acquisition of Millbrook in November 2007, as our specialty distribution division primarily distributes to the supermarket channel.

Gross Profit

Our gross profit increased approximately 24.4%, or $124.3 million, to $633.9 million for the year ended August 2, 2008, from $509.6 million for the year ended July 28, 2007. Our gross profit as a percentage of net sales was 18.8% for the year ended August 2, 2008 and 18.5% for the year ended July 28, 2007. Gross profit as a percentage of net sales during the year ended August 2, 2008 was positively impacted by sales from the UNFI Specialty Distribution business and sales of our branded product lines. We worked to take advantage of forward buying opportunities during the year ended August 2, 2008 in order to improve UNFI Specialty Distribution's gross margin. We expect UNFI Specialty Distribution's full service supermarket model, to generate a higher gross margin over the long-term in our core distribution business; however, we also expect to incur higher operating expenses in providing those services. Under this model, we provide services typically performed by supermarket employees to our customers, such as stocking shelves, placing sales orders and rotating out damaged and expired products. We continue to focus on increasing our branded product revenues, which we believe will allow us to generate higher gross margins over the long-term, as branded product revenues generally yield higher margins.

Gross profit as a percentage of net sales during the year ended July 28, 2007 was negatively impacted by missed forward buying opportunities, the full year effect of new customer agreements, $0.5 million of spoilage issues related to certain inventory of Albert's, and $1.9 million of incremental inventory adjustments in our broadline distribution business; partially offset by increases in rates within our fuel surcharge program, which passes to our customers the increased fuel costs associated with distributing our products to customers.

Operating Expenses

Our total operating expenses increased approximately 30.1%, or $125.3 million, to $541.4 million for the year ended August 2, 2008, from $416.1 million for the year ended July 28, 2007. The increase in total operating expenses for the year ended August 2, 2008 was primarily due to increases in infrastructure, fuel and other distribution expenses in our wholesale division to support our sales growth of approximately $31.2 million and a $60.1 million increase in operating expenses as a result of the Millbrook acquisition. We have been able to partially offset the effect of rising fuel prices by increasing delivery sizes, improving route design and by opening new facilities which reduce the total distance traveled to customers. We also incurred higher operating expenses during the year ended August 2, 2008 related to our branded product lines, as we have built our infrastructure to support anticipated new business, and $6.3 million in labor and start-up expenses related to our new distribution facilities in Sarasota, Florida, Ridgefield, Washington, Moreno Valley, California and York, Pennsylvania.

Total operating expenses for the year ended July 28, 2007 included a loss of $1.5 million related to the sale of one of our Auburn, California facilities, $1.1 million of incremental and redundant costs incurred in connection with the start up of our Sarasota, Florida facility, $1.0 million of costs to transition our expanded relationship with Whole Foods Market in the Southern Pacific region of the United States to our facility located in Fontana, California, an impairment charge of $0.8 million related to the reclassification of the remaining Auburn, California facility to held-for-sale and $0.5 million of increased expense related to our fuel hedging program. The last of our fuel hedges expired in June 2007 and we have not entered into any fuel hedges in fiscal 2008. Total operating expenses for fiscal 2008 includes share-based compensation expense of $4.7 million, compared to $4.0 million in fiscal 2007. See Note 3 "Stock Option Plans" to our Consolidated Financial Statements included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.

As a percentage of net sales, total operating expenses increased to approximately 16.1% for the year ended August 2, 2008, from approximately 15.1% for the year ended July 28, 2007. The increase in operating expenses as a percentage of net sales was primarily attributable to our acquisition of Millbrook, which has higher operating expenses due to the additional in store services provided to supermarket customers, $6.3 million in labor and start-up expenses related to our new distribution facilities in Sarasota, Florida, Ridgefield, Washington, Moreno Valley, California and York, Pennsylvania as well as operating inefficiencies related to the recent opening of the Sarasota, Florida and Ridgefield, Washington facilities, and our investment in infrastructure for our branded product lines. We expect that the opening of new facilities will contribute efficiencies and lead to lower operating expenses related to sales over the long-term. As noted above, however, we expect to continue to incur operating expenses higher than we historically have experienced as a result of UNFI Specialty Distribution's full service supermarket model.

Operating Income

Operating income decreased approximately 1.1%, or $1.0 million, to $92.5 million for the year ended August 2, 2008, from $93.5 million for the year ended July 28, 2007. As a percentage of net sales, operating income was 2.7% for the year ended August 2, 2008 compared to 3.4% for the year ended July 28, 2007.

Other Expense (Income)

Other expense (income) increased $4.0 million to $15.3 million for the year ended August 2, 2008, from $11.3 million for the year ended July 28, 2007. Interest expense for the year ended August 2, 2008 increased to $16.1 million from $12.1 million in the year ended July 28, 2007. The increase in interest expense was due primarily to the increase in debt levels required to fund our acquisitions of DHI and Millbrook and three branded product companies. Debt levels also increased for the year ended August 2, 2008 compared to the year ended July 28, 2007 as a result of UNFI Specialty Distribution's working capital needs and increased inventory levels in preparation for the opening of the Sarasota,

Florida and Ridgefield, Washington facilities in the first and second quarters of fiscal 2008, respectively, and capital expenditures related to the future opening of our Moreno Valley, California and York, Pennsylvania facilities. Interest income for the year ended August 2, 2008 decreased to $0.8 million from $1.0 million in the year ended July 28, 2007.

Provision for Income Taxes

Our effective income tax rate was 37.2% and 39.0% for the years ended August 2, 2008 and July 28, 2007, respectively. The decrease in the effective income tax rate for the year ended August 2, 2008 was primarily due to anticipated tax credits associated with the solar panel installation projects at our Rocklin, California and Dayville, Connecticut distribution facilities. This decrease was offset by an increase in our effective income tax rate due to the acquisition of DHI and Millbrook. Our effective income tax rate was also affected by share-based compensation for incentive stock options and the timing of disqualifying dispositions of certain share-based compensation awards. Certain incentive stock option expenses are not deductible for tax purposes until a disqualifying disposition occurs. A disqualifying disposition occurs when the option holder sells shares within one year of exercising an incentive stock option. We receive a tax benefit in the period that the disqualifying disposition occurs. Our effective income tax rate will continue to be effected by the tax impact related to incentive stock options and the timing of tax benefits related to disqualifying dispositions. In fiscal 2009 we expect our effective tax rate to be in the range of 39.5% to 40.0%.

Net Income

Net income decreased $1.7 million to $48.5 million, or $1.13 per diluted share, for the year ended August 2, 2008, compared to $50.2 million, or $1.17 per diluted share, for the year ended July 28, 2007.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

Three Months Ended April 26, 2008 Compared To Three Months Ended April 28, 2007

Net Sales

Our net sales increased approximately 21.1%, or $154.4 million, to $887.0 million for the three months ended April 26, 2008, from $732.5 million for the three months ended April 28, 2007. This increase was primarily due to sales from our newly acquired Millbrook business of $77.2 million as well as organic sales growth (sales growth excluding the impact of acquisitions) in our wholesale division of $72.7 million. Our organic growth is due to the continued growth of the natural products industry in general and the opening of new distribution centers, which allows us to carry a broader selection of products.

On a combined basis, and excluding sales to Henry’s and Sun Harvest store locations, which were divested by Whole Foods Market following its merger with Wild Oats Markets, Whole Foods Market and Wild Oats Markets accounted for approximately 32.0% and 35.9% of our net sales for the three months ended April 26, 2008 and April 28, 2007, respectively. The Henry’s and Sun Harvest locations divested by Whole Foods Market remain our customers.

Sales to Henry’s and Sun Harvest store locations have been reclassified from our supernatural channel into our supermarket channel in both the current and prior year and will continue in this classification going forward. This reclassification resulted in an increase in sales in the supermarket channel of 1.6% and a decrease in sales in the supernatural channel of 1.6% for the three months ended April 28, 2007.

Sales by channel have been adjusted to properly reflect changes in customer types resulting from a review of our customer lists. As a result of this adjustment, sales to the independents and other channels increased 1.1% and 0.5%, respectively, for the three months ended April 28, 2007 and sales to the supermarket channel decreased 1.6% for the three months ended April 28, 2007.

Compared to sales for the three months ended April 28, 2007, sales in the supermarket channel were positively impacted for the three months ended April 26, 2008 by our acquisition of Millbrook and negatively impacted for the three months ended April 26, 2008 by the loss of a key customer in the first quarter of fiscal 2008.

Gross Profit

Our gross profit increased approximately 27.6%, or $35.9 million, to $165.8 million for the three months ended April 26, 2008, from $129.9 million for the three months ended April 28, 2007. Our gross profit as a percentage of net sales was 18.7% and 17.7% for the three months ended April 26, 2008 and April 28, 2007, respectively. Gross profit as a percentage of net sales during the three months ended April 26, 2008 was positively impacted by sales from our Millbrook business and sales through our branded product lines. We have worked to take advantage of forward buying opportunities during the three months ended April 26, 2008 in order to improve Millbrook’s gross margin. We expect Millbrook's full service supermarket model to generate a higher gross margin over the long-term in our core distribution business; however, we also expect to incur higher operating expenses in providing those services. Gross profit as a percentage of net sales during the three months ended April 28, 2007 was negatively impacted by missed forward buying opportunities and $1.9 million of incremental inventory adjustments in our broadline distribution business. We intend to increase our emphasis on sales of branded products, which we believe will allow us to generate higher gross margins over the long-term, as branded product revenues generally yield relatively higher margins.

Operating Expenses

Our total operating expenses increased approximately 34.5%, or $36.2 million, to $141.0 million for the three months ended April 26, 2008, from $104.8 million for the three months ended April 28, 2007. The increase in total operating expenses for the three months ended April 26, 2008 was due primarily to increases in infrastructure, fuel and personnel costs within our wholesale division of approximately $29.7 million, as a result of the Millbrook acquisition and to support our continued sales growth. We have been able to partially offset the effect of rising fuel prices by increasing delivery sizes, improving route design and by opening new facilities which reduce the total distance traveled to customers. We also incurred higher operating expenses during the three months ended April 26, 2008 related to our branded product lines as we have built our infrastructure to support anticipated growing business. Operating expenses for the three months ended April 28, 2007 included $0.5 million of increased expense related to our fuel hedging program. The last of our fuel hedges expired in June 2007 and we have not entered into any fuel hedges during fiscal 2008. Total operating expenses for the three months ended April 26, 2008 includes share-based compensation expense of $1.1 million. Share-based compensation expense for the three months ended April 28, 2007 was $1.0 million. See Note 2 to our condensed consolidated financial statements.

As a percentage of net sales, total operating expenses increased to approximately 15.9% for the three months ended April 26, 2008, from approximately 14.3% for the three months ended April 28, 2007. The increase in operating expenses as a percentage of net sales was primarily attributable to our acquisition of Millbrook, our investment in infrastructure for our branded product lines, and continued operating inefficiencies related to the opening of our Sarasota, Florida and Ridgefield, Washington distribution facilities. Despite these inefficiencies, we expect that the opening of new facilities will contribute efficiencies and lead to lower operating expenses related to sales over the long-term.

Operating Income

Operating income decreased approximately 1.2%, or $0.3 million, to $24.8 million for the three months ended April 26, 2008 from $25.1 million for the three months ended April 28, 2007. As a percentage of net sales, operating income was 2.8% for the three months ended April 26, 2008, compared to 3.4% for the three months ended April 28, 2007. The decrease in operating income as a percentage of net sales is attributable to the increase in operating expenses as a percentage of net sales for the three months ended April 26, 2008, compared to the three months ended April 28, 2007, which is primarily attributable to our acquisition of Millbrook.

Other Expense (Income)

Other expense (income) increased $1.5 million to $4.1 million for the three months ended April 26, 2008, from $2.7 million for the three months ended April 28, 2007. Interest expense of $4.2 million for the three months ended April 26, 2008 represented an increase of 38.6% from the three months ended April 28, 2007 due primarily to the increase in debt levels required to fund our acquisitions of Millbrook and branded product companies. Debt levels also increased for the three months ended April 26, 2008 compared to the three months ended April 28, 2007 as a result of Millbrook’s working capital needs and increased inventory levels in preparation for the opening of the Sarasota, Florida and Ridgefield, Washington facilities in the first and second quarters of fiscal 2008, respectively, and capital expenditures related to the future opening of our Moreno Valley, California facility.

Provision for Income Taxes

Our effective income tax rate was 37.2% and 39.0% for the three months ended April 26, 2008 and April 28, 2007, respectively. The decrease in the effective income tax rate was primarily due to anticipated tax credits associated with the solar panel installation projects at our Rocklin, California and Dayville, Connecticut distribution facilities. This decrease was offset by an increase in our effective income tax rate due to the acquisition of Millbrook. Our effective income tax rate was also affected by share-based compensation for incentive stock options and the timing of disqualifying dispositions of certain share-based compensation awards. SFAS 123(R) provides that the tax effect of the book compensation cost previously recognized for an incentive stock option that an employee does not retain for the minimum holding period required by the Internal Revenue Code (a “disqualified disposition”) is recognized as a tax benefit in the period the disqualifying disposition occurs. Our effective income tax rate will continue to be effected by the tax impact related to incentive stock options and the timing of tax benefits related to disqualifying dispositions.

Net Income

Net income decreased $0.7 million to $13.0 million, or $0.30 per diluted share, for the three months ended April 26, 2008, compared to $13.7 million, or $0.32 per diluted share, for the three months ended April 28, 2007.

CONF CALL

Marilyn Meek

By now you should have all received a copy of this morning’s press release. If anyone still needs a copy, please contact Janet Jasmine in our New York office at 212-827-3777, and we’ll send you a copy immediately following this morning’s conference call.


With us this morning from management is Michael Funk, President and Chief Executive Officer; and Mark Shamber, Chief Financial Officer. We will begin with some opening comments from management, and then we will open the line for questions. As a reminder, this call is also being webcast today and be accessed on the Internet at www.unfi.com.

Before we begin, as usual, we would like to remind everyone about the cautionary language regarding forward-looking statements contained in the press release. That same language applies to comments made on this morning’s conference call.

With that, I’d like to turn the call over to Michael Funk.

Michael Funk

Joining me on the call this morning is Mark Shamber, our Chief Financial Officer.

Earnings per share for the quarter were $0.30 or $12.8 million compared to earnings of $13.1 million a year ago. Our recently acquired Millbrook Specialty Foods Division was dilutive to our results by $0.07 or $2.9 million. Excluding Millbrook, earnings would’ve been $0.37 or $15.7 million compared to Q4 a year ago when we earned $0.31 per share. In addition, when we add to this, the incremental nonrecurring impact of start-up costs with our Southern California and York, Pennsylvania, facilities, it results in an additional pickup of 17 basis points or approximately $0.03 per share.

As a reminder, our fourth quarter was a 14-week quarter and sales for Q4 were a record $911.9 million, a 29% increase over the fourth quarter sales a year ago of $706.8 million. If we exclude the extra week in the quarter in sales of Millbrook, our sales growth was 11.9%. When we look back at 2008, we saw an incremental improvement in year-over-year percentage sales increases per every quarter, even with a sluggish economy and sales to our super natural channel coming in below expectations.

Our sales growth by channels, our numbers are as follows: the supernatural channel grew at a rate of 7.9%. The supermarket channel grew at a rate of 67.1%, and independents continued their strong performance and grew by 13.3%. Our Food Service sector grew at 38.5%.

In Q4, we saw our top 100 largest independent accounts grow by 14.39% on a same-store year-over-year basis. The significant increase in our independent sales suggests consumers are changing shopping patterns that are more influenced by fuel consumption than ever before. Local independents seemed to be attracting new business, perhaps at the expense of other stores which require additional miles for shoppers to drive to.

As a percentage of our total business, supernaturals were 31.9%, supermarkets were at 20.8%, and independents were 42.9%, and food services was 2.4%. For the quarter, our service fulfillment rate were 97.93%, up slightly from last quarter; and our time deliveries were 99.33%, a strong improvement over the previous quarter as well.

Gross margin improved to 19.5% versus the 18.7% from Q4 a year ago. Contributing to the improvement in gross margin, we’re improved Millbrook gross margin, increased fuel surcharges, and our purchasing departments improved performance at passing through the tremendous number of price increases from our suppliers. Cost inflation continued to be high for the quarter. We tracked our year-over-year product inflation at 5.67%, reflecting the higher commodity pricing, freight increases, an impact of higher fuel costs of our vendors’ products.

Operating expenses were 16.9% for the quarter compared to 15.3% a year ago. Our nonrecurring expenses related to the Southern California and York, Pennsylvania facilities start-up costs resulted in 30 basis points of increased expense while increased fuel costs contributed another 33 basis points. Higher expenses related to Millbrook accounted for the remaining differential.

While Millbrook’s performance to the customer continues to improve with optimum fulfillment and field service levels, sales were under our expectations for the quarter. We do believe management has positioned Millbrook to build sales in 2009, both from gaining new customers as well as building sales with existing accounts. A number of new business initiatives are in place and moving forward. While our expectations for new accounts being added during the remainder of calendar 2008 are conservative due to avoiding disruptions during the retailers’ busy holiday period, we do believe that we’ll add new accounts for combined Millbrook and UNFI activity in 2009.

Millbrook’s results were impacted by nonrecurring expenses for the quarter of approximately $0.03. The majority of this was a one-time credit to two accounts no longer doing business with the Company, along with some severance costs associated with the reduction in the workforce. In July a reduction of staff of 138 full-time employees with an annualized payroll of $4.9 million was implemented, which we’ll see the benefit of moving into 2009.

We have accelerated integration efforts between UNFI and Millbrook, which will also begin to improve results in 2009, particularly in the back half of the year. We had hoped to be neutral to earnings by the first quarter of ’09, but now forecast dilution of around $0.06 on an operating basis for the full year 2009. We expect to continue to see incremental improvement on a quarter-to-quarter basis throughout 2009.

Our Blue Marble Branded Division grew at a rate of 37% for the quarter, driven by some new acquisitions recently completed, 2009 forecast for brand growth [inaudible] 25% increase without factoring in any new acquisitions. We continue to be focused on adding brands, which bring accretive value-added branded products to our portfolio.

Capex for 2009 is estimated to be in the $57 to $62 million range, reflecting our continued investments in facilities and infrastructure. This year we’ll see an additional 1.3 million square feet replacing our Southern California and Pennsylvania facilities, as well as a new warehouse in Texas towards the later pat of 2009. Once these investments are made, we should have no new facility expenditures with the exception of a 2010 expansion of the current Dayville location. Assuming current growth trends, we should have ample capacity for several years without further investment in facilities.

As we look ahead to fiscal 2009, we forecast revenue growth in the 10% to 12% range bringing ’09 sales to the $3.63 to $3.7 billion range. In addition, we estimate our earnings per share to be in the $1.30 to $1.38 range, which is an increase of 15% to 22% over fiscal ’08. Baked into these numbers is dilution for our specialty division of $0.06 per share and start-up costs for our new facilities and our relocations to be $0.10 per share.

Now I’d like to turn it over for further details on our financial numbers to Mark Shamber, our Chief Financial Officer.

Mark Shamber

Net sales for the fourth quarter of 2008 which consisted of 14 weeks were $911.9 million. This represented an increase of $205 million or approximately 29% over fiscal 2007 fourth quarter revenues of $706.8 million. In fiscal 2008, our fourth quarter consisted of 14 weeks rather than the usual 13 weeks as fiscal 2008 was a 53-week fiscal year. On a comparable number of weeks bases, net sales for the fourth quarter increased by 20.6% over the prior year and 11.9%, excluding the impact of the Millbrook acquisition.

For the fiscal year ended August 2008, net sales increased by $611.6 million, or 22.2%, to $3,366 million compared to fiscal 2007 net sales of $2,754 million. Excluding Millbrook and adjusting for the 53rd week, fiscal 2008 sales increased by 12.4% over fiscal 2007.

Gross margin for the quarter finished at 19.5% compared to 18.7% for the fourth quarter of ’07. This represents an 83 basis point improvement over the prior year and an 81 basis point improvement over the proceeding quarter. During the quarter, we continue to make progress in improving gross margin within our specialty division, which has been focus since the acquisition. We also benefited from higher fuel surcharge revenues and improved purchasing, as Michael mentioned earlier. As a reminder, the offset for our fuel surcharges, our outbound fuel costs, which are reflected within operating expenses on our income statement.

Gross margin for fiscal 2008 came in at 18.8% compared to 18.5% for the prior year, which represents an improvement of 33 basis points over fiscal 2007, primarily due to the areas just discussed.

Operating expenses for the fourth quarter were 16.9% of sales compared to 15.3% for the same period last year, a 150 basis point increase. During the quarter, we incurred $2.7 million or approximately 30 basis points in nonrecurring expenses and startup costs associated with our new facilities in Moreno Valley, California, and York, Pennsylvania.

The incremental cost of fuel for the quarter had a negative impact of $2.4 million in operating expenses in comparison to the third quarter of fiscal 2008 as fuel represented a 137 basis points of net sales in the fourth quarter, an increase of 26 basis points over the third quarter and an increase of 33 basis points over the prior year after adjusting for fiscal 2007’s unfavorable fuel hedge. Fuel costs continue to be a challenge in the fourth quarter, reaching a national average price of $4.60 a galloon using the Department of Energy’s weekly prices, an increase of approximately 63% over the prior year average for the fourth quarter of $2.83 a gallon.

Share-base comp during the quarter was approximately $1.2 million, or 13 basis points, compared to $1 million, or 15 basis points, in the prior year.

Operating income for the quarter was 2.6% on a GAAP basis, a 75 basis point decline over the prior year’s fourth quarter operating income of 3.4%. Adjusting for the cost associated with Moreno Valley and York, operating income would’ve been 2.9% for the quarter, a 58-basis point decline over the prior year operating income of 3.5% after adjusting the prior year for $921,000 in costs associated with Sarasota and Richfield facilities in fiscal 2007.

Our effective tax rate for the quarter and fiscal year ended August 2, 2008, was 37.2% compared to 39% for the fourth quarter and fiscal year 2007. Net income for the fourth quarter decreased by 2.3% to $12.8 million compared to the $13.1 million earned in the fourth quarter ended July 28, 2007. Diluted earnings per share decreased to $0.30, a $0.01 decrease over prior year diluted EPS of $0.31.

As I mentioned in discussing operating expenses, net income in the quarter was negatively impacted by $2.7 million of labor costs and related start-up expenses associated with our new facilities by approximately $0.04 diluted EPS. Fiscal 2008 net income decreased by 3.3% to $48.5 million or $1.13 per diluted share compared to $50.2 million or $1.17 per diluted share for fiscal 2007.

Operating expenses for the full year were 16.1% of sales compared to 15.1% for the same period last year, reflecting an increase of 98 basis points year-over-year. For fiscal 2008, fuel costs increased by 15 basis points to 113 basis points for fiscal 2008 compared to the prior year of 98 basis points after adjusting out the prior year fuel hedge. This increase in fuel is reflective of the savings that we achieved in opening new facilities in Sarasota, Florida, and Richfield, Washington, during the first half of fiscal 2008 and would’ve been much greater had the Company not opened these facilities.

Operating income was 2.75% for the year compared to 3.39% for fiscal 2007, a decline of 64 basis points. After excluding the impact of start-up costs associated with the new facilities, operating income for 2008 was 2.9% compared to fiscal 2007 of 3.5% for a year-over-year decline of 60 basis points.

Cash generated by operations for the fiscal year was $9.2 million compared to $35.5 million in the prior year, with most of this being an investment in inventory. Our inventory was at 53 days for the fourth quarter, above the high end of our target range of 47 to 50 days and a four-day increase over the fourth quarter of fiscal 2007. This increase was driven in part by building up inventory levels at our Moreno Valley, California, facility in anticipation of a September opening combined with our efforts during the year at our specialty division. DSO for the fourth quarter was at 20 days, again favorable to our target range of 22 to 25 days and a one-day improvement over the fourth quarter of the prior year. .

Capital expenditures were $51.1 million for fiscal 2008, equating to approximately 1.52% of revenues for the fiscal year. As discussed in our press release, our fiscal 2009 capital expenditures guidance is $57 to $62 million. Included in our fiscal 2009 capex guidance, our cost associated with completing the Moreno Valley and York, Pennsylvania, facilities. We will begin operating out of the Moreno Valley facility this coming weekend and the York facility should commence operations toward the end of our second fiscal quarter in January 2009. In addition, our 2009 capex guidance includes costs associated with opening a new distribution facility in Texas no earlier than the fourth quarter of fiscal 2009.

The company’s outstanding commitments under our amended and restated credit facility as of August 2nd were approximately $306 million with an available liquidity of $90 million, including cash, cash equivalents.

The press release this morning also announced our full year revenue earnings per share and capex guidance for fiscal 2009. For the fiscal year ending August 1, 2009, revenues are expected to increase approximately 10% to 12% from fiscal 2008 on a comparable basis to a range of $3.63 to $3.70 billion. Fiscal year 2009 earnings per diluted share are expected to be in the range of $1.30 to $1.38 per share, an increase of 15% to 22% over fiscal 2008.

Our fiscal 2009 earnings guidance includes approximately $7.4 million or approximately $0.10 per diluted share in labor costs and related start-up expenses associated with opening the Moreno Valley, California, and York, Pennsylvania, facilities during the first half of fiscal 2009 as well as the opening of an additional facility in Texas during the fourth quarter of fiscal 2009.

For fiscal 2009, we expect our effective tax rate to be in the range of 39.6% to 40% compared to our tax rate of 37.2% for fiscal 2008 where we benefited from federal tax credits associated with our solar power projects in both Rocklin, California, and Dayville, Connecticut.

That concludes my prepared remark; and at this time, we’ll turn the call over to the operator to facilitate the question-and-answer session.


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