DISCONTINUED OPERATIONS

In conjunction with the Supervalu acquisition, the Company announced its plan to sell the remaining acquired retail operations of Supervalu (“Retail”). The results of operations, financial position and cash flows of Cub Foods, Hornbacher’s, Shoppers and Shop ‘n Save St. Louis and Shop ‘n Save East retail operations have been presented as discontinued operations and the related assets and liabilities have been classified as held-for-sale.

On November 7, 2018, the Company announced it had entered into a definitive agreement to sell five of its eight Shop ‘n Save East stores to GIANT Food Store, LLC. The transaction is expected to close in early 2019, subject to customary closing conditions, including compliance with certain federal and state level requirements. During the second quarter of fiscal 2019, the Company closed three Shop ‘n Save East stores.

In the second quarter of fiscal 2019, the Company closed the remaining Shop ‘n Save St. Louis retail stores and the distribution center that were not sold prior to the acquisition date.

In December 2018, the Company completed the sale of seven of its eight Hornbacher's locations, as well as Hornbacher's newest store currently under development in West Fargo, ND, to Coborn's Inc. (“Coborn’s”). The Hornbacher's store in Grand Forks, ND is not included in the sale to Coborn's and will close pursuant to the terms of the definitive agreement. As part of the sale, Coborn's entered into a long-term agreement for the Company to serve as the primary supplier of the Hornbacher's locations and expand its existing supply arrangements for other Coborn’s locations.

Operating results of discontinued operations (in thousands) are summarized below:



	13-Week Period Ended January 26, 2019			26-Week Period
	13-Week Period Ended January 26, 2019			Ended January 26, 2019⁽¹⁾
Net sales	$	727,037		$	773,635
Cost of sales	533,639			568,173
Gross profit	193,398			205,462
Operating expenses	167,092			176,586
Operating income	26,306			28,876
Interest income	661			453
Net periodic benefit income, excluding service cost	(147		)	(158		)
Equity in earnings of unconsolidated subsidiaries	(853		)	(883		)
Income from discontinued operations before income taxes	26,645			29,464
Income tax provision	5,239			5,987
Income from discontinued operations, net of tax	$	21,407		$	23,477


(1)	These results reflect retail operations from the Supervalu acquisition date of October 22, 2018 to January 26, 2019.

The Company recorded $265.2 million and $287 million within Net sales from continuing operations attributable to discontinued operations inter-company product purchases in the 13-week and 26-week periods ended January 26, 2019, respectively, which we expect will continue subsequent to the sale of certain retail banners. These amounts were recorded at gross margin rates consistent with sales to other similar wholesale customers of the acquired Supervalu business. No sales were recorded within continuing operations for retail banners that the Company expects to dispose of without a supply agreement, which were eliminated upon consolidation within continuing operations and amounted to $153.6 million and $163.4 million in the 13-week and 26-week period ended January 26, 2019.

The carrying amounts (in thousands) of major classes of assets and liabilities that were classified as held-for-sale on the Condensed Consolidated Balance Sheets follows in the table below. The assets and liabilities of discontinued operations were acquired as part of the Supervalu acquisition, and as of January 26, 2019, the purchase price allocation related to these assets and liabilities was preliminary and will be finalized when valuations are complete and final assessments of the fair value of other acquired assets and assumed liabilities are completed. There can be no assurance that such final assessments will not result in material changes from the preliminary purchase price allocations. Due to the recent closing of the transaction, some amounts reported are provisional pending the review of valuations obtained from third parties. The Company’s estimates and assumptions are subject to change during the measurement period (up to one year from the acquisition date), as the Company finalizes the valuations of certain tangible and intangible asset acquired and liabilities assumed. The fair value of discontinued operations, determined as of the acquisition date, includes estimated consideration expected to be received, less costs to sell. Within the Company’s determination of fair value of the respective disposal groups, the Company incorporates the impact of the fair value of off-balance sheet multiemployer pension plan obligations that it expects to sell so that long-lived assets are not reduced below their fair value.



(in thousands)	January 26, 2019
Current assets
Cash and cash equivalents	$	4,359
Receivables, net	3,187
Inventories	145,476
Other current assets	6,871
Total current assets of discontinued operations	159,893
Long-term assets
Property, plant and equipment	356,271
Goodwill	201
Intangible assets	57,105
Other assets	2,071
Total long-term assets of discontinued operations	415,648
Total assets of discontinued operations	$	575,541

Current liabilities
Accounts payable	$	69,021
Accrued compensation and benefits	38,592
Other current liabilities	26,368
Total current liabilities of discontinued operations	133,981
Long-term liabilities
Other long-term liabilities	1,141
Total long-term liabilities of discontinued operations	1,141
Total liabilities of discontinued operations	135,121
Net assets of discontinued operations	$	440,420

Additional Retail Accounting Policies

Revenues from retail product sales are recognized at the point of sale upon customer check-out. Sales tax is excluded from Net sales. Limited rights of return exist with our customers due to the nature of the products we sell. Advertising income earned from franchisees that participate in the Company’s retail advertising program are recognized as Net sales. Loyalty program expense in the form of fuel rewards is recognized as a reduction of Net sales. Franchise agreement revenue is recognized within Net sales.

Retail advertising expenses are included in cost of sales of discontinued operations, net of cooperative advertising reimbursements. Operating expenses of discontinued operations include employee-related costs, such as salaries and wages, incentive compensation, health and welfare and workers’ compensation, and occupancy costs, including utilities and operating costs of retail stores, and depreciation and amortization expense, impairment charges on property, plant and equipment and other administrative costs. Rent expense on operating leases and capital lease amortization expense of retail stores have not been included in discontinued operations, as we expect to remain primarily obligated under these leases. Refer to Note 15. “Leases” for additional information.

Retail inventories are valued at the lower of cost or market under LIFO. Substantially all of our inventory consists of finished goods and are valued under the retail inventory method (“RIM”) or replacement cost method to value discrete inventory items at lower of cost or market under the FIFO method before application of any LIFO reserve.