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United Natural Foods (UNFI 0.53%)
Q4Â 2020 Earnings Call
Sep 29, 2020, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the UNFI fourth-quarter fiscal 2020 earnings call. [Operator instructions] I would now like to hand the conference over to your speaker today, Steven Bloomquist, vice president, investor relations. Thank you. Please go ahead, sir.
Steven Bloomquist -- Vice President, Investor Relations
Good morning everyone. Thank you for joining us on UNFI's fourth-quarter fiscal 2020 earnings conference call. By now, you should have received a copy of the earnings release issued yesterday afternoon. The press release, webcast and the supplemental slide deck are available under the investors section of the company's website at www.unfi.com.
Joining me for today's call are Steve Spinner, our chairman and chief executive officer; John Howard, our chief financial officer; Chris Testa, president of UNFI; and Eric Dorne, our chief operating officer. Steve, Chris and John will provide a business update, after which we'll take your questions. Before we begin, I'd like to remind everyone that comments made by management during today's call may contain forward-looking statements. These forward-looking statements include plans, expectations, estimates and projections that might involve significant risks and uncertainties.
These risks are discussed in the company's earnings release and SEC filings. Actual results may differ materially from the results discussed in these forward-looking statements. And lastly, I'd like to point out that during today's call, management will refer to certain non-GAAP financial measures. Definitions and reconciliations to the most comparable GAAP financial measures are included in our press release.
With that, I will now turn the call over to Steve.
Steve Spinner -- Chairman and Chief Executive Officer
Thank you Steve. Good morning everyone, and thanks for joining us on our year-end call. As you saw, in addition to reporting our fourth-quarter and fiscal-year results, we also announced a succession plan for my role as CEO. I'll speak more about that shortly.
But first, we'll discuss our fiscal 2020 results. We finished the fiscal year early last month, and it truly was a monumental year for UNFI in many respects. Our financial results in the fourth quarter and for the year produced record sales and adjusted EBITDA driven initially by the strength of our integration work and consumer demand driven by COVID as well as UNFI's execution success. Fourth-quarter sales grew 8%, while adjusted EBITDA grew 28% resulting in a 50-basis-point expansion in our adjusted EBITDA margin.
This strong margin performance is a testament to the efficiency of our network and our ability to generate operating leverage as we increase our top line. For the full year, we generated $284 million of free cash flow and reduced our net debt outstanding by nearly $390 million, exceeding our full-year debt reduction expectations. Our net debt to adjusted EBITDA leverage ratio finished the year at four times, about a full turn lower than at the end of last year. Now these results wouldn't have been possible without the people and culture at UNFI.
And I want to thank all UNFI associates for their outstanding focus and execution during what have been unprecedented times for our company and for our country. The passion and caring of our people and our company have been clearly demonstrated in recent months. During the early days of COVID, we proactively took action to manage the spike in demand from customers and consumers while prioritizing the health and well-being of our associates as evidenced by our early response with heightened safety, sanitation protocols and flexibility to our attendance and productivity policies. I'm so proud of our culture.
Our response to communities in need, social and justice, diversity and inclusion puts UNFI on the leading edge of continuing to do what's right. We have a strong diversified customer base from which we can grow sales. We have an unmatched distribution center network that we've shown, can handle demand, capacity and performance at scale. With one new business from a variety of customers including those who self distribute to their stores, but recognize the value we can bring to their operations.
And we believe we'll win more business going forward. Towards that goal, we've successfully hired several new leaders to further enable long-term success including a new chief supply chain officer, a new CIO and a new chief marketing officer, all of which positions us well for the future. There is power in our scale, pride in our partnerships and people. And we have never been better positioned for future growth.
We've delivered on our promise to transform the world of food throughout North America and build considerable momentum toward building a better future with better food. Let me now turn the call over to Chris to provide more context on our business performance. Chris?
Chris Testa -- President
Thanks Steve, and good morning everyone. It is my pleasure to join today's call to talk about key trends in our business as well as the drivers that differentiate UNFI and give us confidence for long-term growth. I'll also provide brief comments on operations and our retail results. As you saw in yesterday's press release, we've changed our sales channel reporting.
John will get into the details and rationale behind these changes that now focus on the size of the customer rather than the nature of the products purchased, but I'll comment on the performance of each channel in the quarter. Fourth-quarter sales to chains, our largest channel, accounting for about 40% of sales totaled $2.7 billion, an increase of 6.9% over last year on a comparable 13-week basis. Our fourth quarter change growth rate includes a 270-basis-point headwind from three customer bankruptcies that occurred in the second quarter of fiscal '20. Without that headwind, sales growth of chain customers would have been nearly 10%.
Fourth-quarter sales to independent retailers, our next largest channel, totaled $1.8 billion accounting for about 26% of sales in the quarter. Independent retailer sales grew 11.4% compared to last year. Independents have benefited greatly during the past seven months driven by a population migration from cities to suburbs and a growing consumer desire to shop in smaller footprint stores and support local businesses. Our third largest channel at 17% of sales in the fourth quarter is supernatural, and represent sales to our largest customer.
Fourth-quarter sales in this channel were $1.1 billion, 3.6% greater than last year. The growth in this quarter versus prior quarters is due in part to the impact of categories that have been adversely impacted by COVID, such as bulk and ingredients used for prepared foods. We expect our year-over-year sales to this customer to improve as we move through fiscal 2021. Sales within our other channel which represents roughly 8% of our total revenue were slightly more than $500 million, down 2.1% from last year.
Strong growth in e-commerce sales, the fastest-growing part of our business were offset by anticipated declines in military and foodservice related to COVID. Finally, retail sales amounted to $640 million which represents an identical or same-store sales increase of over 21%. This reflects strong retail and e-com sales, particularly at Cub, who aggressively marketed its home delivery and click and collect services, both which led to year-over-year e-com sales growth rate in the triple digits. The retail team has done a great job protecting the safety of our 6,000-plus retail associates and our customers while making sure the stores are running as efficiently as possible.
We are pleased with the performance from the retail operations and all the team does for its customers and its communities. Looking across all these channels. Our top 100 wholesale customers grew sales by more than 12%. Our top 100 customers represent over 70% of our wholesale revenue, with an average annual purchases of at least $30 million.
These customers are winning with UNFI. Part of our sales growth with the top 100 customers this quarter came from our cross-selling efforts which we've talked about in previous calls. In fiscal '20, we realized over $250 million of cross-selling revenue which meaningfully exceeded our goal. Customers have expressed a desire to expand their offerings, and we believe we have an unmatched selection of products and services to help them do so.
Let me elaborate on the opportunities. Earlier this year, we added top 1,500 to 3,500 top selling natural and organic SKUs into our conventional distribution centers to help customers expand their offerings with on-trend products. Also, professional services division made almost 1,000 new cross-selling wins into UNFI's natural customer base. As a reminder, our professional services group offers turnkey retail and back-of-the-house solutions to help our customers run their businesses more efficiently.
Finally, we're also using our diverse portfolio to help retailers keep their shelves full by replacing long-term out-of-stock items with alternative items that have plenty of inventory. And the good news is we're only getting started as cross-selling gains in fiscal '20 with a sum of many small wins, where we introduce new items or services that align with store offerings with consumer trends. Moving forward, we see greater growth opportunity within our existing customer base and displacing other wholesalers or supplementing captive distribution with UNFI's unique ability to build out the store. Wholesale distribution remains fragmented which means despite UNFI's scale, we have tremendous opportunity to grow through cross-selling and expanding penetration just with our existing customers.
Remember, freedom of food choice matters to our customers and their end consumers. And over the past seven months, our wholesale business proved the incredible power of scale we've built and the transformational service we provide to our partners. Another area of differentiation is e-commerce, where COVID has led to an unprecedented spike in demand for online grocery purchases. It is estimated that U.S.
grocery purchases have hit e-com adoption rates that were not expected to be achieved in three years in just three months and UNFI has multiple ways to capitalize on these trends. First, we have several large .com providers as customers and their sales grow, our sales grow. We also have B2B businesses, UNFI Easy Options and On a Screen. That sell grocery and wellness items direct to alternative channels such as bakeries or fitness studios that enjoy the flexibility of the program and our direct to door delivery.
Finally, we have a well-established and growing turnkey program that allows traditional brick-and-mortar retailers to offer e-commerce buying solutions to their shoppers on a very similar platform used by our retail banners, Cub and Shoppers. This includes website and phone app offerings as well as leveraging our two-year relationship with leading e-commerce providers to receive preferred pricing for product selection and/or delivery. As a proof of the success we're experiencing, since the beginning of COVID, we've added 300 storefronts to our e-commerce platform as many of our customers have asked us to help them with offering additional purchase options to their shoppers. Looking forward, we'll continue to leverage these business models in addition to expanding our e-com revenue opportunities.
Private brands represents another big opportunity for us. Leading into COVID, our private brands portfolio of over 5,000 SKUs across 20 brands generated over $2 billion of retail sales which place our private brands group at revenue levels equal to about the top 50 food and beverage companies. In the fourth quarter, our Brands+ portfolio grew over 17%, and we believe there are sustainable trends that are going to continue to fuel growth including an economic downturn where consumers are looking for value and quality. And the emergency consumer behavior of brand swapping.
According to McKinsey, 36% of consumers tried a different brand since COVID and 73% plan to continue this behavior. Our brands plus portfolio benefited from higher service level than national brands which helped us capture consumers. We love these trends because they create loyalty for our customer stores and they drive better margins for both UNFI as well as our retailers. We have an experienced team leading our brands business, and we're planning on driving incremental future growth through product innovation and increasing penetration of our base business.
In addition to looking at incremental sales opportunities with our customers, we're also aggressively pursuing new business. We use sophisticated CRM technology to track over 1,000 sales opportunities ranging in size and channel type from smaller independents to medium and large chains. Our diverse customer base and our unique ability to sell multiple channels is an incredible asset that we're just beginning to leverage. Switching gears to operations.
We've now completed the Pacific Northwest consolidation of five distribution centers into two DCs in Ridgefield, Washington and Centralia, Washington. We will be adding automation to our Ridgefield location by the end of the fiscal year, and we have begun introducing automation in our new state-of-the-art Riverside facility in Southern California. Automation will be used primarily for each PIC technology which will help us provide higher throughputs, better accuracy and more efficiently service the Southern California and surrounding market that we believe has a great growth potential for UNFI. Our continued focus on managing cost, balance against the safety of our associates helped lower wholesale operating costs as a percentage of sales by nearly 35 basis points in the fourth quarter compared to last year.
And we're optimistic we can realize the leverage of scale to continue to lower our opex rate. Going forward, we'll be placing a heavy emphasis on standardizing processes and using higher level data analytics to drive decision-making and generate these incremental operating efficiencies. This is the next logical step and the transition we've previously spoken about moving from integration to optimization and applies on both the revenue and the expense side of the business. As Steve stated, the last two quarters have proven that we can leverage higher sales into expanded operating margins, even with headwinds from COVID related costs.
And finally, before I turn it over to John, I want to comment on our annual National Expo that we originally planned to host in person last month but instead made into a virtual selling show. This is an event that historically drew thousands of customers and suppliers. It combined educational sessions with an unmatched buying show and networking capabilities. We were amazed with the participation levels at our virtual event this year and over $400 million in sales recorded at the show, a total that surpassed last year's in-person event as retailers want to take advantage of favorable buying opportunities and to secure inventory for the holiday season.
I want to thank our suppliers and customers for such a great response. We truly appreciate the trust you place on us. Hopefully, we can all get together in person next year. But until that time again many thanks from all of us at UNFI.
With that, I'll turn the call over to John.
John Howard -- Chief Financial Officer
Thank you Chris. On today's call, I'll cover our fourth-quarter financial performance, balance sheet, capital structure and outlook for fiscal 2021. Before I do that, let me address two of the accounting and reporting changes reflected in our fourth-quarter and full-year financial statements found in yesterday's press release. As we discussed on our last call, we've moved our retail operations into continuing operations.
As a result, the retail sales, gross profit and operating expenses from our retail operations will now be part of our statement of operations or P&L. Previously, these retail items were included within the single line entitled income from discontinued operations net of tax. There is no change to adjusted EBITDA as a result. We'll begin depreciating the fixed assets of retail which will add incremental expense to our GAAP and adjusted earnings which I'll elaborate on more in a moment.
We've also changed our sales channel reporting to better reflect the underlying nature of our customer base. Our new channel breakdown reflects the continued move away from natural and conventional toward one UNFI and present sales based on customer size defined by store count, rather than the predominant nature of products carried, meaning natural versus conventional. Customers who typically operate more than 10 stores are now presented in our chains sale channel. And those with fewer than that are presented as independent retailers.
The definition of our supernatural channel has not changed, with Whole Foods remaining the only customer currently included in this channel. The definition of our other channel remains substantially unchanged as well. This is explained in more detail in footnote 1 of our press release. Lastly, as a reminder, we previously reported wholesale sales to Cub under the assumption that banner would be sold with a supply agreement.
Now that we're presenting cubs retail sales, those wholesale sales to Cub are now eliminated. With that accounting backdrop, let's move to the strong results we delivered in the fourth-quarter. Net sales for the 13-week fourth-quarter totaled $6.8 billion. This represents an 8% increase over last year's fourth-quarter on a comparable 13-week basis.
You'll recall last year's fourth-quarter had an additional week as part of our 53-week fiscal 2019, and that week contributed approximately $475 million in sales to the quarter and fiscal year. Fourth-quarter gross margin rate was approximately 41 basis points higher than last year's fourth-quarter. The largest driver was our retail operations where sales grew at a greater rate than wholesale and where lower levels of promotional spending drove a higher retail gross margin rate. These factors contributed 29 basis points to the consolidated gross margin rate.
The remaining increase came from wholesale driven by favorable inbound freight expense and a lower year-over-year LIFO charge as inflation rates came in lower than we had anticipated. These items were partially offset by decreased levels of vendor funding and slotting income. Fourth-quarter operating expense rate decreased 20 basis points compared to last year's fourth-quarter. Our lower operating expense rate was driven by the benefits of our synergy and integration efforts as well as strong leverage on the fixed portions of our operating and administrative costs.
It is important to note that Q4 included $31 million or 45 basis points of COVID-related expenses to more both the health, welfare and safety of our associates. Our strong sales increases, higher gross margin rate and focused expense management translated into very strong profit performance. Fourth-quarter adjusted EBITDA was $198 million, an increase of 28% versus last year's fourth-quarter on a 13-week comparable basis. Similar to Q3, the expanded adjusted EBITDA margin rate clearly demonstrates our ability to handle higher volumes and efficiently leverage those sales into higher EBITDA margins.
Fourth-quarter net interest expense was $46 million, a decline of $9 million from last year on a comparable 13-week basis driven by lower average debt balances and interest rates. The effective borrowing rate for the fourth-quarter was approximately 6.6%, down 20 basis points from last year's fourth-quarter primarily attributable to lower LIBOR rates compared to last year. Q4 GAAP EPS was $0.89 per share which included net charges of $0.17 per share as broken out in our press release. fourth-quarter adjusted EPS was $1.06 per share, a 205% increase from last year's fourth-quarter adjusted EPS when excluding the additional week last year.
Let me go back to the retail depreciation comment I made earlier, and which you'll recall, I previewed on our last call due to its impact being included in the updated fiscal 2020 guidance we gave in June. Without getting too technical, when a business is placed in discontinued operations, the assets related to that business are classified as assets held for sale and depreciation on those assets is stopped. If that business is later moved from discontinued operations back into continuing operations, like we're doing with the majority of our retail business, the accounting rules require the company to calculate the depreciation of the assets going back to the date that the assets were originally categorized as held for sale and record a charge. For our retail business, that means that we must calculate depreciation going back to the end of Q1 of fiscal 2019 and include in this quarter's GAAP results the entire depreciation for those seven subsequent quarters.
This amounts to $50 million or approximately $0.71 per share when spread across the two fiscal years. This quarter's adjusted EPS includes just the $0.07 of depreciation that relates to the fourth-quarter of fiscal 2020. We're applying the same approach to calculating our full-year FY '20 adjusted EPS which now includes $0.31 per share of charge for retail depreciation. The remaining $0.40 of retail depreciation is included in the full-year fiscal 2019 results which have been recast to reflect this change.
Lastly, with retail being reported within continuing operations, we are now reporting it as a separate segment. To assist investors, we've included historical quarterly segment information for fiscal 2019 and fiscal 2020 as part of the supplemental slides posted to our website. The presentation of adjusted EBITDA for retail includes the rent expense that was previously reported within continuing operations as well as an allocation of administrative overhead costs. Turning to the balance sheet.
We finished the year in a much improved financial position with total outstanding net debt of $2.6 billion and total liquidity of nearly $1.3 billion, a combination of strong free cash flows and asset sale proceeds partially offset by an increase in finance lease obligations led to a $390 million reduction in our net debt level versus the end of fiscal 2019. Our lower net debt balance and strong Q4 operating performance drove our leverage down to four times which, as Steve stated, is about a full turn less than where we ended fiscal 2019. Overall, we're very pleased with our performance this year. We significantly beat our initial full-year guidance.
We reduced net outstanding debt by more than we originally anticipated through stronger free cash flow, while still retaining valuable assets that we plan to sell in the future, and we're entering the new fiscal year in a significantly stronger financial position with favorable operating momentum. Turning to our outlook for fiscal 2021. As we all know, today's operating environment is changing faster than at any time in recent history and presents challenges to making financial projections. However, we are providing our outlook for fiscal 2021 based on a set of key assumptions as follows.
First, our sales guidance assumes food at home consumption remains elevated and continues to outpace food purchases away from home, particularly in the winter months when outdoor dining becomes less of an option in many parts of the country. We believe this will be the case through this fiscal year which lines up with recent CDC reports that suggest a widespread vaccine is not likely to be available until next summer, a scenario that obviously could change. At the same time, we are expecting to continue to incur some COVID-related costs including continued safety and sanitation protocols. As we've talked about before, lower promotional spending at retail and fewer new item introductions will both adversely impact us this year.
We're also not anticipating another stock-up surge like the unprecedented buying frenzy experienced in March. And finally, we're planning to make various operational and commercial investments that will be a continuation of our network integration and optimization work as well as incurring modestly higher employee benefit costs. With all of that taken into consideration, for fiscal 2021, we expect full-year net sales to be in the range of $27 billion to $27.8 billion which represents a nearly $900 million increase over fiscal 2020 or about 3.3% at the midpoint. As you'd expect, we anticipate that the first two quarters will show higher year-over-year growth rates.
While we expect continued demand and strong results in the back half of the fiscal year, it's important to keep in mind that year-over-year comparisons will moderate as we lap the pantry building that occurred at the outset of COVID during March and April of 2020. And while we still expect elevated demand in the third quarter, sales in that quarter are expected to be lower than the third quarter of fiscal 2020 due to the unprecedented stock-up surge as COVID began to spread. We're expecting adjusted EBITDA for fiscal 2021 to be in the range of $690 million to $730 million, an increase of 5.5% at the midpoint and a growth rate well above the rate of the sales increase. Adjusted EPS is expected to be in the range of $3.05 to $3.55 per share, an increase of 21% at the midpoint.
This reflects our expectations for increase in adjusted EBITDA, lower interest expense tied to lower debt levels and an adjusted effective tax rate of approximately 27%. We expect to reduce net outstanding debt by a minimum of $300 million primarily through free cash flow. Capital expenditures are expected to be in the range of $200 million to $250 million. We're assuming minimal asset sale proceeds beyond the monetization of the $40 million note receivable related to fiscal 2020 sale of the Tacoma distribution center.
We expect our net leverage to be less than 3.4 times by the end of the fiscal year. In summary, we're all very pleased with our fiscal 2020 results and excited for what we believe will be an even stronger year in fiscal 2021. With that, let me turn the call back to Steve.
Steve Spinner -- Chairman and Chief Executive Officer
Thanks John. As you heard, we will build our business in fiscal 2021 and beyond. Through wholesale, services, brands, protein, fresh and so much more, we expect another year of strong growth which we expect will incrementally expand our EBITDA margin. We plan to further deleverage the balance sheet through continued focus on generating free cash, managing capex and monetizing assets where it makes sense.
We also remain firmly committed to being good stewards of our planet, our communities and our people. Over the past year, we've taken several steps to advance environmental, social and governance practices, ESG, in our businesses including the publication of our first SASB disclosure which measures UNFI's sustainability efforts against a series of industry-specific standards. Two, completing of materiality assessment to prioritize initiatives. And three, establishing board level oversight of our programs as well as an internal executive committee to provide strategic review and accountability on ESG topics.
Our ESG program is aligned to three pillars: better for our world, better for our communities and better for our people. As it relates to our world, we continue to focus on reducing our environmental impact, conserving natural resources and promoting sustainability across our value chain and in our operations. In early 2020, UNFI joined the climate collaborative, solidifying commitments to energy, efficiency, food waste reduction and sustainable transportation. As for our communities, we believe that healthy food and food variety matter, and we play a vital role in delivering safe, quality and nutritious food options to more tables across North America.
We are also working to increase access to better food, particularly for people in low-income and rural communities or in vulnerable situations. The UNFI foundation provides grants to nonprofit organizations working to build better food systems and to nurture everyday health. As for our people, the safety and well-being of our associates is our top priority. We are focused on fostering a culture of caring throughout our organization, continuously striving toward safety in our workplace where 0 injuries and accidents is possible.
We have pledged to promote equality, celebrate diversity, dismantle systemic racism and support racial justice by activating change from the inside of UNFI and then out through listening, learning and accountability. We will do this by increasing diversity in leadership roles, addressing food and security through financial in-kind and volunteer support. And by leading change across our industry and in the food system. All of these practices are integral to our business strategy, and we believe they deliver significant value to our stakeholders including our shareholders, our associates, customers, suppliers and communities.
Finally, let me spend a moment talking about my decision to retire as CEO. As many of you know, I've had the privilege to lead this great company for the past 12 years. When I joined UNFI, annual sales were around $3 billion. Working with some great leaders some amazing retail customers.
We've grown the business to nearly $27 billion in sales this past year. Through it all, we've adhered to a set of principles that have defined my life and my career. Doing the right thing, treating people fairly and with dignity, helping one another and winning together as a team. I couldn't be happier with our leadership team, old and new, and the strong governance and operating disciplines in place.
I have complete confidence that UNFI will continue to grow, to innovate and lead our industry into the future. And our future has never been brighter as we near completion of UNFI integration activities and move our attention to expansion of our services, technology, e-commerce, parameter and services businesses. 2020 demonstrated to me that all the work done during the last several years around building a holistic wholesale business was the right strategic decision. Within a year, feels like the right time to turn the reins over to the next-generation of leadership.
I'm excited to remain involved in our continued journey as Executive chairman, and will work to ensure a smooth transition when my successor is named. I will also remain involved in the search for talented new board members who share our passion for this business, and it will contribute their talents to support our growing $27 billion business. The future of UNFI has never been stronger. As we think about the next decade, I'm confident that UNFI will continue to lead by remaining true to its culture while advancing investments in supply chain, services, technology and a commitment to bring value to its customers every single day.
With that, I thank you, and we're prepared to take your questions.
Questions & Answers:
Operator
[Operator instructions] Your first question comes from Bill Kirk of MKM partners. Your line is open.
Bill Kirk -- MKM Partners -- Analyst
Hey, thank you for taking the question. I wanted to talk a little bit about the upcoming holiday season and what you're seeing maybe in terms of actions by your retail customers. Are you seeing anything from them in terms of increasing inventory days that they're willing to hold or pulling forward some of their holiday spending or is holiday assortment?
Chris Testa -- President
Hey, Bill. This is Chris. Good morning. So the retailers are -- they've got limited space.
So they would probably like to increase their inventory, but they're limited in what they can do. I can tell you from our perspective, two major things are happening. One, we began talking about the holidays early in the summer and began to build up on those holiday like items, broth, cranberry sauce, pumpkin spice and so forth. Because we think it's going to be a big holiday season with a lot of small gatherings versus big gatherings.
From a retailer perspective, the one behavior that we're seeing is at our recent show, there was a huge interest from our retailers to secure inventory ahead of time. In other words, commit to the inventory to be delivered to make sure the stock -- their shelves were stocked. And then finally, for any of those products that are still long term out of stocks, and we all know what they are. We've been finding alternative supply for our retailers to make sure the shelves are full for the holiday season.
Bill Kirk -- MKM Partners -- Analyst
OK. Great. And then I guess related, what are you seeing in terms of freight lanes or freight availability for this holiday season?
Eric Dorne -- Chief Operating Officer
Bill, this is Eric. We are seeing increased requests for freight lanes. We obviously have a great deal of strength in that, and we are leveraging our size to secure the lanes we need. So at this time, we do not see an issue with that, but we're watching it very carefully.
Chris Testa -- President
Yeah. And remember, Bill, that the vast majority of the fleet we own and operate. And for the product that we move across country or by rail, we do have contract carriers with contracted volume. So that's not a problem that we're going to face.
Bill Kirk -- MKM Partners -- Analyst
Awesome. Thank you. I'll hop back in the queue.
Operator
Your next question comes from Karen Short of Barclays. Your line is open.
Karen Short -- Barclays -- Analyst
Hi, thanks very much. Congratulations, Steve. I've been talking to you for a long time. I know we'll get a few more quarters in there.
Steve Spinner -- Chairman and Chief Executive Officer
Great. Thanks Karen.
Karen Short -- Barclays -- Analyst
So I'm sorry to start off with this, but there's just so many things model related. So ideal to start with some housekeeping questions. I guess the first question I had with respect to retail EBITDA. Are you burdening that EBITDA margin? So when I look at the margin, are you burdening that with distribution costs, meaning allocating for distribution cost to retail or it's a seller -- as a seller and a buyer looking at your EBITDA margins, would they need to hit that with additional distribution, assuming you didn't attain the distribution?
Steve Spinner -- Chairman and Chief Executive Officer
Yeah, so that's a true EBITDA number. So if we were to look to sell that business today, that would be the EBITDA that would we would sell it from. And the other comment that I would make about retail, just to remind everybody that we do have some very valuable retail real estate. In other words, corporately owned stores that when the time is right, we'll also sell with the sale of the batter.
Karen Short -- Barclays -- Analyst
OK. So it doesn't -- you are burdening your distribution. And then the second question, just in terms of modeling. Can you give a color on what comps were for retail in 4Q of '19?
Steve Spinner -- Chairman and Chief Executive Officer
John, do you have that offhand? I don't.
John Howard -- Chief Financial Officer
Yup. Q4 of '19 for -- Karen, when you asked that question, you're talking sales?
Steve Spinner -- Chairman and Chief Executive Officer
In depth. In depth.
Karen Short -- Barclays -- Analyst
Well, no, just to get a sense of what the two-year comp is, right? Because obviously, 21% is a very strong comp, but I'm trying to get that in -- from a two-year basis.
John Howard -- Chief Financial Officer
OK. So the account from '19, we don't -- for '19 with the '18 data post acquisition, we don't have the '18 data.
Karen Short -- Barclays -- Analyst
OK. And then I guess switching gears to the top line. Obviously, you gave us where you were trending in August. And this is more of a chain comment, but you gave us where you were trending on the top line, and that was that 11% number, and you saw some deceleration.
Maybe can you just talk in terms of where you reported the quarter? So I guess the first question is where did you see the deceleration most prominently? And then where are you trending in the quarter to date on top line?
Steve Spinner -- Chairman and Chief Executive Officer
Well, let me take a first cut at it, and then I'll turn it over to Chris. So again, in our chain number, we still have some of those -- couple of those bankrupt customers in there that we're not getting the revenue from. We are also seeing some retailers that are negatively impacted by COVID. In other words, those retailers that are heavily focused on bulk prepared foods, those categories that are just not selling.
Obviously, foodservice and military are still fairly negative even though foodservice has come back a bit. There's certainly no inflation in the numbers. There's no promo, and we don't expect to see that. So I think those are the primary drivers in that 8% number.
Chris?
Chris Testa -- President
No. That's good, Steve. I mean, look, the general market dynamics as well, if you look at the quarter in its entirety from May through July. Even if you look at retail comps that are reported out there, there's definitely been a deceleration across the entire industry.
But what I would look to is our top 100. If you look at our top 100 which is over 70% of our customers, it was 12%. So I think you can use that as you're comparable to what is happening at retail after you factor in retail inflation and the difference between retail and wholesale there.
Steve Spinner -- Chairman and Chief Executive Officer
One thing I would add Karen is that the interesting thing that we learned as a result of this dramatic increase as a result of COVID is that our view of building capacity is different today than it was perhaps six months ago. We have more capacity than we thought. And so that was one of the great takeaways. And so as a result of that, we think that -- and we're very optimistic that our business that we thought would be constrained in many markets.
We're now actively addressing. In other words, we're working hard to put protein and produce and a lot of other categories into these buildings that we thought were at capacity which really aren't.
Karen Short -- Barclays -- Analyst
OK. That's helpful. And sorry, just color on the top line and the quarter to date.
Steve Spinner -- Chairman and Chief Executive Officer
John, do you want to handle that one?
John Howard -- Chief Financial Officer
Yeah. I think we're not providing any information beyond the annual guidance at this point, Karen. I think as we said in our scripts and our opening comments, we're continuing to expect the elevated demand through FY '21. It's unprecedented.
We're in unchartered territory as it relates to the pandemic. But we do believe that the FY '21 guidance is sustainable. But as far as what we've seen so far in the first four or six weeks. We're not going to provide commentary on that right now.
Steve Spinner -- Chairman and Chief Executive Officer
I would just add, yes we're not seeing anything materially different.
Karen Short -- Barclays -- Analyst
OK, great. Thanks very much.
Operator
Our next question comes from Rupesh Parikh of Oppenheimer. Your line is open.
Rupesh Parikh -- Oppenheimer and Company Inc. -- Analyst
Good morning. Thanks for taking my question. And Steve also congrats on your future retirement.
Steve Spinner -- Chairman and Chief Executive Officer
Thanks Rupesh.
Rupesh Parikh -- Oppenheimer and Company Inc. -- Analyst
So I guess to start out. John, you gave some color I think at a high level in terms of some of the EBITDA margin drivers. If you can maybe flush out what you think are the key positive, negative drivers as we look out for the balance of the year. And it sounds like, at least based on your guidance, you guys are expecting some very modest EBITDA margin expansion.
John Howard -- Chief Financial Officer
Yeah. I think when we think about FY '21, we certainly have some tailwinds related to the foundation that we laid from the integration as we continue to go through the productivity and benefit from the synergy work that's already been done. We're going to continue to see those tailwinds. And certainly, the elevated demand will provide that continued tailwind.
But at the same time, we've got some headwinds going year over year as well. So we've got -- as we've talked about in previous quarters, we'll have the continued lower promotional spend and slotting fees that would normally benefit us, but they have substantially disappeared in this environment. We're also seeing, as you look through our disc ops that have been reported, we benefited in FY '20 by certain shopper stores that provided EBITDA throughout the year but have since been sold or shutdown. And that's a $10 million to $15 million headwind for us going into FY '21.
And then we've got an additional headwind related to the life insurance proceeds that we talked about earlier in FY '20 to the tune of about $8 million. So we've got -- certainly, some tailwinds going in, but we've got some of those headwinds as well from an operational, promotional spend, slotting dollars, disc ops, but we still believe with all of the work that we've done leading up to this point, we still believe very firmly on the guidance range that we provided.
Steve Spinner -- Chairman and Chief Executive Officer
Rupesh, I would just add that keep in mind that '20, even though it's behind us, was an incredible year with a lot of adversity. And obviously, you see that in the results. We're not -- again, we're not going to have a repeat of what happened in March and April, at least we don't think so. It is possible as the restaurants start to close for the winter, people start going back inside.
It is possible that we'll see some surge. But we still live in a pretty volatile environment, whether it's because of COVID election, weather, additional cost associated with all those things. So we live in a pretty volatile day. There's also no inflation.
There's no promo spend that John mentioned earlier. We're growing EBITDA faster than our revenue. And as I said earlier, we realized that we actually have more capacity than we thought. And so we provided guidance because it was important for us to provide guidance.
It's guidance that we believe in, but it does take into consideration all the things I just mentioned.
Rupesh Parikh -- Oppenheimer and Company Inc. -- Analyst
I think $200 million, $250 million for this year. Just given your commentary just about that you guys have more capacity maybe than what you guys thought previously. Is there an opportunity I guess to reduce that capex spending?
John Howard -- Chief Financial Officer
Well, our capex, right -- I'm sorry.
Steve Spinner -- Chairman and Chief Executive Officer
I mean -- go head, John. Go ahead, John.
John Howard -- Chief Financial Officer
Yeah. So our capex is at the $200 million to $250 million. It's still -- it's about 80 bps of revenue for us. Some of that is some work that was targeted in FY '20 that we thought we were going to be able to do.
But we did have, as you might imagine, with the elevated demand, some of those projects were delayed, and we're going to be implementing those in FY '21. We are still working through some of the additional synergies as we go after that last stage of the initiatives that we'll do in FY '21 and '22. So I think as we think about capex longer term, I think in that 80 bps range of revenue, 90 bps is probably reasonable. And then as we get on the other side of the last stage of the synergy work, I think we'll see it normalize a little bit below that.
Steve Spinner -- Chairman and Chief Executive Officer
And automation is really important to us Rupesh, as evidenced by the couple of pretty significant projects that we had going on during COVID that are going to be completed in the not-too-distant future. Services business, technology, that's where we're going to see the -- really the primary spend of capex over the next couple of years.
Rupesh Parikh -- Oppenheimer and Company Inc. -- Analyst
Great. Thank you.
Operator
Your next question comes from Scott Mushkin of R5 Capital. Your line is open.
Scott Mushkin -- R5 Capital -- Analyst
Hey, guys. Thanks for taking my questions. I have a couple of them. So I just wanted to look back a little bit on the chains growth rate which -- I know we talked about last quarter.
It does seem like it's underperforming the industry a little bit. Even if you take into account the 270-basis-point drag. And so I was wondering what you guys think is maybe driving that -- I mean, it's obviously a good number, but I just want to think -- what you think maybe is driving that, what looks like a little bit underperformance.
Chris Testa -- President
Hey, Scott. This is Chris. Yes, I mean, look, it's -- we've got a diverse customer base, right? And I think looking at again I would point to the top 100 which includes chains predominantly as well as some of our indie co-ops. That 12% is really reflective of what you're seeing at retail, minus the inflation that retail enjoys that wholesale hasn't had.
But again, you look at change that 10% with -- if you included the 270 bps of the bankruptcies, it's actually a pretty strong number. And within that, we've got some chains that are growing 18%, 20%, 25%. Some are 60%, 70%. And these again all in our top 50 or 100 customers.
So I think we feel really good about the change growth. And if you combine our chains and indies combined, you're looking at a number of around 9%, and then you add in the bankruptcies and you get to over 10%. So I think what you're seeing in our larger customers is indicative to what you're seeing happening at the retail at large.
Scott Mushkin -- R5 Capital -- Analyst
Thanks Chris. Just to follow-up on that, and then get to my other question is, do you think you guys are seeing losses of customers or you're not seeing any losses?
Steve Spinner -- Chairman and Chief Executive Officer
No. We're not seeing any loss.
Scott Mushkin -- R5 Capital -- Analyst
So then my questions about the future are number one, margin improvement in the distribution business. You guys tend to operate at a pretty low margin, super hard too. But I do believe there's lots of kind of low-hanging fruit there. Any thought processes on how '21 will look on getting some improvement there? And then and then it's '22.
And then also -- and no one's talked about it, but the replacement process for Steve. And by the way, Steve, congratulations.
Steve Spinner -- Chairman and Chief Executive Officer
Thank you Scott. So why don't I start with the replacement process. So we have gone out and hired one of the leading firms to conduct a search. That process has begun.
We have serious internal candidates. We have external candidates that we'll consider. Culture, experience are incredibly important to me and to the Board. The good news is that I want this to be a very, very smooth process.
And we have a year in which to do it which I think is more than enough time. And I certainly plan on staying on as Executive chairman to continue through the transition and for as long as the company needs me to do it. So I can't think of a better circumstance or scenario by which to pass the torch to the next leader. And I feel really good about it.
I think for me, personally, the 2020 numbers, and what I expect to happen in 2021, really proved out the acquisition of conventional. We went out on a limb a little bit to do it. I think investors initially didn't like it as evidenced by the stock price. But it was right on.
It was 100% right. And you saw that in our numbers. We were able to leverage the top line into the bottom line. We're going to continue to do that.
And that goes right into your second -- your first question which is on margin improvement. I think all the work that we're doing in technology and integration and singular systems and network optimization, we're all going to have the net effect of improving our operating margin, reducing our expenses and improving our operating margin.
Chris Testa -- President
Yeah. Steve, I just want to add to that is that three big opportunities we have in the margin expansion is cross selling, selling more products to the existing customer base. And we think there's a tremendous opportunity there as well as our brands and services business which are both margin accretive to the typical wholesale margin. So just some other areas that we are aggressively pursuing to help with that margin expansion.
Steve Spinner -- Chairman and Chief Executive Officer
And our pipeline is incredible. I mean our pipeline has never been stronger than it is today. And I think a lot of those opportunities came as a result of COVID. And certainly, in the cases of the captives that relied heavily on UNFI to help them get product to the stores.
A lot of that, we think, will grow. New customers and expanded relationships with existing customers, especially in light of a new capacity. I'm more optimistic than I've ever been about pipeline for growth.
Scott Mushkin -- R5 Capital -- Analyst
Thanks guys. I appreciate the answers.
Operator
Our next question comes from Jim Salera of Northcoast Research. Your line is open.
Jim Salera -- Northcoast Research -- Analyst
Hey guys. Congrats on the quarter. Two questions. I wanted to dig in on the cross-selling opportunities.
So with the $250 million, can you guys break down how much of that is more the technology, e-commerce, professional service? How much of it is organic and traditional products?
Chris Testa -- President
Yeah, Jim. This is Chris. Sure. The vast majority of it is put on the truck versus the services business.
Services business has a lot of small wins from a revenue standpoint, although very high margins. But the vast majority of the $250 million came from cross-selling products, either natural products into the conventional system or vice versa.
Jim Salera -- Northcoast Research -- Analyst
OK.
Steve Spinner -- Chairman and Chief Executive Officer
I would also add that back to a comment that Chris made earlier on our brands business. I mean we now have brands that are over $2 billion in retail. And these are all brands that we own that many of the retailers view as their own private label, and that obviously is quite margin accretive to us as well.
Jim Salera -- Northcoast Research -- Analyst
Yeah. Can you guys actually get a little more granular, both on the kind of the margin profile for some of the professional services and then the private labels just relative to the traditional distribution margin?
Steve Spinner -- Chairman and Chief Executive Officer
Yeah, I think actually that's a competitive edge for us. So we're not going to disclose what the margins are on our brands or our services. But rest assured they're considerably greater than the margins that we earn on our wholesale distribution.
Jim Salera -- Northcoast Research -- Analyst
OK. And then if I can just sneak in one more question. You guys talked about the 300 or so online storefronts that you added. Just kind of generally, what do you think the opportunity is there? Because obviously, we've seen a lot of people shifting to that online platform.
And as you guys touched on the online shopping has really taken off three years in less than a year's time. So what do you guys think just the overall opportunity is when you look at your existing customer base and I guess additional customers that you could pay up along.
Chris Testa -- President
Yeah. It's a good question. I mean e-com was roughly 3% of total grocery sales going into COVID, and now it's estimated to be up around 8% or 9%. So certainly, having an e-com solution is going to be critical for us going forward.
In the most case, we enjoy e-com sales because a lot of those click and collect and deliver to homes are happening and through the registers that we currently service. In other words, they are retail customers that are wholesale customers of ours that have an e-com solution. So those 300 storefronts that we've added since COVID, those are typically the independent retailers that are looking to get more competitive and adapt to consumers' needs. I think that's one of the ways that will capture e-com.
But that's in addition to servicing some very large e-com delivery companies, customers. And so in addition to having our own e-com platform through On a Screen and Easy Options. So we're also, Jim, looking at additional ways to capture e-com because it's here, it's here to stay, and we're going to continue to find ways to participate in it.
Jim Salera -- Northcoast Research -- Analyst
Thanks guys.
Operator
Your next question comes from Edward Kelly of Wells Fargo. Your line is open.
Edward Kelly -- Wells Fargo Securities -- Analyst
And Steve congrats as well.
Steve Spinner -- Chairman and Chief Executive Officer
Thanks, Edward.
Edward Kelly -- Wells Fargo Securities -- Analyst
I wanted to ask you about guidance for next year. Can you just talk a bit more about the cadence of sales and EBITDA? I mean obviously the first half will look different than the back half. Just any additional color that you can provide on what you're assuming in the back half as you lap the COVID demand?
John Howard -- Chief Financial Officer
Yeah, absolutely. So I think you touched on the key points there, Ed which is as we lap the Q3 and Q4 and that demand that we saw that surge that happened in March and April which is our Q3. That will be a difficult comp for us. And while we're still anticipating the elevated demand throughout FY '21 as food-at-home stays high.
It's going to be a tough comp quarter -- year over year for that Q3. So as we think about it, we are expecting that the first half will be a higher growth rate, and even though demand will stay at that elevated level. And in Q3, we'll tamper down some and in Q4 we'll come back up. So as we think about that full year.
That's sort of what we're thinking. And it's -- I think from a sales perspective, I don't want to despite of the fact that as we think about FY '21, and we're anticipating that growth that we have in our guidance, we did see in Q3 and Q4 year-over-year growth of $1.2 billion. And we're still growing on top of that with FY '21. So we're still seeing that elevated demand, and we're still going to benefit from that and feel very good about that growth.
Steve Spinner -- Chairman and Chief Executive Officer
And one other thing Ed is when you think about volatility, there is still a fair amount of volatility associated with fill rate. And while fill rate has sequentially improved, and we're now seeing fill rate on the natural side. I think it's like 600 basis points or so better than the fill rate on the conventional side. And so our expectation is that fill rate will continue to improve generally.
We may see a decline around the holidays but that's still a moving target.
Jim Salera -- Northcoast Research -- Analyst
OK. And then I wanted to just take a step back and I know you're not going to give any guidance for FY '22. But this is when hopefully life is more normal again. It's probably the year that we should think about sort of valuing the company at.
What, if anything, I guess has transpired within sales and margins over this period do you think is sustainable? Like how would you encourage us to sort of think about the new normal for this business as we look past this -- the pandemic?
Steve Spinner -- Chairman and Chief Executive Officer
Well, I would start by saying what -- returning to normal takes quite a few current headwinds and turns them into tailwinds, right? So promo spend, advertising, new product introductions, fill rate. Those are all things that are pretty significant headwind for us that will turn into a tailwind. As we continue to complete the integration work, and that is the migration onto a singular technology platform. That turns from a headwind to a tailwind.
All things we expect to happen. Capacity. Certainly, by 2022, we expect a considerably additional amount of customer wins through cross-selling as well as new contracts. So even though the restaurant industry will regain volume.
I think we'll still be in a great position to take advantage of all those things that are currently headwinds that will then be tailwinds, led by what I said.
John Howard -- Chief Financial Officer
Yes. The only thing I'll add to that Ed was in the interim, we are making permanent reductions in our debt as we're benefiting from that free cash flow. We are reducing that debt as we did in FY '20 as we're forecasting and guided to in FY '21. We are continuing to go after that debt.
Steve Spinner -- Chairman and Chief Executive Officer
Yeah. And remember that by '22 or end of '22, we're selling Cub. And you can do the math of what you'd expect to Cub to sell for plus another probably close to $200 million on real estate. And so that in itself will help continue to reduce the load.
Edward Kelly -- Wells Fargo Securities -- Analyst
Great. Thank you.
Operator
Today's final question comes from Kelly Bania of BMO Capital Markets. Your line is open.
Steve Caputo -- BMO Capital Markets -- Analyst
Good morning. This is Steve Caputo on for Kelly. Just to start, would you be able to provide us with what you achieved for synergies in 2020? And what your expectation is for 2021? And if there's any change to sort of your longer-term targets? And then sort of related to that. On a scale of 1 to 10, how would you rate your integration in terms of the level of completeness? And what should we should expect to see going forward and what you need to do?
John Howard -- Chief Financial Officer
Sure. As it relates to synergies, we'll provide a little more color at the Q1 call. But as it relates to synergies, we have outperformed the $185 million target that we put out there both in dollars and in the speed in which we thought it would take to get there. And we're going to provide a lot more information on that as we get to our Q1 call and get into FY '21.
And what was the second part of your question Steve?
Steve Caputo -- BMO Capital Markets -- Analyst
Just in terms of the integration sort of on a scale of 1 to 10, if you can, where you sort of would rank where you've gotten to so far and where you have to go any key sort of areas left to sort of integrate.
John Howard -- Chief Financial Officer
Yeah. So it's tough to rank on a 1 to 10. I think what we have laid out there that we expected to achieve I would say we're at a 10. But we're still -- and it's evidenced by the scale value, the leveraging value we're seeing through our P&L with the elevated demand through FY '20.
A lot of that value was coming as a result of all the synergy work that went into place leading up to it. As we think about what's left, the last big component, there's a thousand things that need to happen before I hand to get there, but the last big piece is that standardization of our DCs that Steve mentioned a little bit earlier. And that's one that we're expecting to kick off toward the end of FY '21 and into FY '22 as the final stage of that synergy work.
Steve Spinner -- Chairman and Chief Executive Officer
Let me just add that the cultural integration is complete. The completion of all of our SG&A, sales, legal, finance, etc., has all been completed. Processes have been completed. The biggest single thing that remains is primarily from a technology platform, and that process has started.
We expect that again to happen throughout fiscal '22. But the vast majority of the work is done.
Steve Caputo -- BMO Capital Markets -- Analyst
OK. That's very helpful. And sorry, just to clarify, you've said you've achieved greater than your expected target of synergies already which is great. Should we be continuing to think about additional synergies in future years on top of that or have you just achieved what you expected even faster than you thought?
John Howard -- Chief Financial Officer
No. I think there's still value to be had out there for synergies. I think we're also continuing to look at optimization and productivity initiatives that will allow us to expand the value that we could achieve. Not just from synergies, but just into a broader productivity and initiative.
And we'll have -- we'll talk a little bit more of this in Q1, and we'll also -- we are currently working on a scheduling an analyst day sometime toward the middle of FY '21 for us.
Steve Caputo -- BMO Capital Markets -- Analyst
Ok, thank you. And just...
John Howard -- Chief Financial Officer
And then just we'll go through that in great detail.
Steve Caputo -- BMO Capital Markets -- Analyst
Got it. OK. And then just one very quick follow-up to what Karen asked earlier. On the retail side, even if you don't have specific numbers for any quarter, would you be able to give us a sense of where comp sales were trending pre COVID? Just a general range would be really helpful for modeling purposes.
John Howard -- Chief Financial Officer
I think the way I would think about that would be it was trending. Cub is a market leader for us here in the Minneapolis market. And the way I would think about it is pre COVID, I think it would be considered trending at or slightly above what the market would have been doing. And especially given the market spending it has here in the Minneapolis, Saint Paul.
And then as COVID hit as many folks solve the value in their retail business. I think Cub was able to capitalize perhaps a little bit more because they were the market leader and a trusted retail store. And I think they also, as they went through some of the civil unrest situations, and we've talked about this on some of our non-deal road shows, but they did a great job managing through some of the civil unrest in Downtown Minneapolis providing access to food when some of the -- obviously, some of the stores were in total disruption and disarray. They provided access to food to many folks that needed it.
We provided buses to other stores in order to provide [Audio gap]
Duration: 69 minutes
Call participants:
Steven Bloomquist -- Vice President, Investor Relations
Steve Spinner -- Chairman and Chief Executive Officer
Chris Testa -- President
John Howard -- Chief Financial Officer
Bill Kirk -- MKM Partners -- Analyst
Eric Dorne -- Chief Operating Officer
Karen Short -- Barclays -- Analyst
Rupesh Parikh -- Oppenheimer and Company Inc. -- Analyst
Scott Mushkin -- R5 Capital -- Analyst
Jim Salera -- Northcoast Research -- Analyst
Edward Kelly -- Wells Fargo Securities -- Analyst
Steve Caputo -- BMO Capital Markets -- Analyst
