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.

In the second quarter of fiscal 2019, the Company closed three of its eight Shop ‘n Save East stores and in the third quarter of fiscal 2019, the Company sold the remaining five Shop ‘n Save East stores to GIANT Food Store, LLC, and did not incur a gain or loss on the sale of this disposal group.

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 Supervalu acquisition date.

In the second quarter of fiscal 2019, 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, North Dakota, to Coborn's Inc. (“Coborn’s”). The Hornbacher’s store in Grand Forks, North Dakota was not included in the sale to Coborn’s and has closed 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 April 27, 2019			39-Week Period Ended April 27, 2019⁽¹⁾
	13-Week Period Ended April 27, 2019			39-Week Period Ended April 27, 2019⁽¹⁾
Net sales	$	640,121		$	1,413,756
Cost of sales	463,157			1,031,330
Gross profit	176,964			382,426
Operating expenses	145,191			321,777
Operating income	31,773			60,649
Interest expense	284			738
Net periodic benefit income, excluding service cost	(146		)	(304		)
Equity in earnings of unconsolidated subsidiaries	(507		)	(1,391		)
Income from discontinued operations before income taxes	32,142			61,606
Income tax provision	7,772			13,759
Income from discontinued operations, net of tax	$	24,370		$	47,847


(1)	These results reflect retail operations from the Supervalu acquisition date of October 22, 2018 to April 27, 2019.

The Company recorded $233.4 million and $520.4 million within Net sales from continuing operations attributable to discontinued operations inter-company product purchases in the 13-week and 39-week periods ended April 27, 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 $128.3 million and $291.7 million in the 13-week and 39-week period ended April 27, 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 April 27, 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)	April 27, 2019
Current assets
Cash and cash equivalents	$	3,019
Receivables, net	2,182
Inventories	136,713
Other current assets	5,607
Total current assets of discontinued operations	147,521
Long-term assets
Property, plant and equipment	337,591
Intangible assets	53,486
Other assets	2,067
Total long-term assets of discontinued operations	393,143
Total assets of discontinued operations	$	540,664

Current liabilities
Accounts payable	$	55,261
Accrued compensation and benefits	39,497
Other current liabilities	21,352
Total current liabilities of discontinued operations	116,110
Long-term liabilities
Other long-term liabilities	935
Total long-term liabilities of discontinued operations	935
Total liabilities of discontinued operations	117,045
Net assets of discontinued operations	$	423,619

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 16. “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.