This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. In some cases you can identify these statements by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "should," "will," and "would," or similar words. You should read statements that contain these words carefully because they discuss future expectations, contain projections of future results of operations or of financial condition or state other "forward-looking" information. The risk factors listed in Item 1A of Part II of this report, as well as any cautionary language elsewhere in this Quarterly Report on Form 10-Q, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations described in these forward-looking statements. You should be aware that the occurrence of the events described in the risk factors in Item 1A of Part II of this report and elsewhere in this Quarterly Report on Form 10-Q could have an adverse effect on our business, results of operations and financial condition.

Any forward-looking statements in this Quarterly Report on Form 10-Q are not guarantees of future performance, and actual results, developments and business decisions may differ from those envisaged by such forward-looking statements, possibly materially. We do not undertake any obligation to update any information in this report until the effective date of our future reports required by applicable laws. Any projections of future results of operations should not be construed in any manner as a guarantee that such results will in fact occur. These projections are subject to change and could differ materially from final reported results. We may from time to time update these publicly announced projections, but we are not obligated to do so.

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, UNFI Specialty Distribution Services ("UNFI Specialty"), which is our specialty distribution business, Albert's Organics, Inc., 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 the Natural Retail Group, which operates our 13 natural products retail stores; and

· our manufacturing division, which is comprised of Hershey Import Company, Inc. ("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 Blue Marble 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; our commitment to high quality service; 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 increase our market share.

We have been the primary distributor to Whole Foods Market, Inc. ("Whole Foods Market"), our largest customer, for more than 10 years. In August 2007, Whole Foods Market acquired Wild Oats Markets, Inc. ("Wild Oats Markets"). We had served as the primary distributor of natural and organic foods and non-food products for Wild Oats Markets prior to the acquisition, and our relationship with Whole Foods Market expanded to cover the former Wild Oats Markets stores retained by Whole Foods Market following the acquisition. Whole Foods Market accounted for approximately 34% and 32% of our net sales for the three months ended May 2, 2009, and April 26, 2008, respectively. 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 33% and 34% of our net sales for the nine months ended May 2, 2009 and April 26, 2008, respectively.

On November 2, 2007, we acquired Distribution Holdings, Inc. and its wholly owned subsidiary Millbrook Distribution Services, Inc. ("Millbrook"), which we now refer to as UNFI Specialty. Through UNFI Specialty, 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 our acquisition of UNFI Specialty accomplished 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 UNFI Specialty'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. 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. Our newly leased, 675,000 square foot distribution center in York, Pennsylvania commenced operations in January 2009 and serves our customers in New York, New Jersey, Pennsylvania, Delaware, Maryland, Ohio, Virginia and West Virginia. In April 2009, we successfully relocated our UNFI Specialty distribution facility in East Brunswick, New Jersey to the York, Pennsylvania distribution center, creating our first fully integrated facility offering a full assortment of natural, organic, and specialty foods.

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 ("SEC") has defined critical accounting policies as those that are both most important to the portrayal of our financial condition and results of operations and require our most difficult, complex or subjective judgments or estimates. Based on this definition, we believe our critical accounting policies include the following:
(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 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 $197.6 million and $179.1 million, net of the allowance for doubtful accounts of $6.2 million and $5.5 million, as of May 2, 2009 and August 2, 2008, respectively. Our notes receivable balances were $2.8 million and $3.8 million, net of the allowance for doubtful accounts of $1.9 million and $1.6 million, as of May 2, 2009 and August 2, 2008, respectively.

Insurance reserves

We 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 $16.2 million and $12.5 million as of May 2, 2009 and August 2, 2008, 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. The assessment of the recoverability of goodwill will be impacted if estimated future cash flows are not achieved. 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. Total goodwill as of May 2, 2009 and August 2, 2008 was $166.5 million and $170.6 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. Total indefinite-lived intangible assets as of May 2, 2009 and August 2, 2008 were $28.3 million and $25.9 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. Total finite-lived intangible assets as of May 2, 2009 and August 2, 2008 were $11.5 million and $7.8 million, respectively.

Results of Operations

The following table presents, for the periods indicated, certain income and
expense items expressed as a percentage of net sales:

                                   Three months ended     Nine months ended
                                  May 2,     April 26,   May 2,    April 26,
                                   2009        2008       2009       2008

Net sales                         100.0%      100.0%     100.0%     100.0%
Cost of sales                      81.0%       81.3%      80.8%      81.4%
         Gross profit              19.0%       18.7%      19.2%      18.6%

Operating expenses                 15.5%       15.9%      16.0%      15.8%
Amortization of intangible assets  0.1%        0.0%        0.1%      0.0%
        Total operating expenses   15.6%       15.9%     16.0%*      15.8%

        Operating income           3.4%        2.8%       3.1%*      2.8%

Other expense (income):
     Interest expense              0.2%        0.5%       0.3%       0.5%
     Interest income               0.0%        0.0%       0.0%       0.0%
     Other, net                    0.0%        0.0%       0.0%       0.0%
     Total other expense           0.2%        0.5%       0.3%       0.5%

     Income before income taxes    3.2%        2.3%       2.8%       2.3%

Provision for income taxes         1.3%        0.9%       1.1%       0.9%

Net income                         1.9%        1.5%*      1.7%       1.5%*

* Total reflects rounding

Three Months Ended May 2, 2009 Compared To Three Months Ended April 26, 2008

Net Sales

Our net sales increased approximately 0.3%, or $2.6 million, to $889.5 million for the three months ended May 2, 2009, from $887.0 million for the three months ended April 26, 2008. This increase was primarily due to organic sales growth (sales growth excluding UNFI Specialty) in our wholesale segment of $26.2 million, partially offset by lower sales within UNFI Specialty due to customer losses that were in process before our acquisition of Millbrook. 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 value-added services, and the opening of new, and expansion of existing, distribution centers, which allow us to carry a broader selection of products.

Whole Foods Market accounted for approximately 34% and 32% of our net sales for the three months ended May 2, 2009 and April 26, 2008, respectively. Whole Foods Market is our only supernatural chain customer following its acquisition of Wild Oats Markets in August 2007.

The following table lists the percentage of sales by customer type for the three months ended May 2, 2009 and April 26, 2008:

     Customer type                                   Percentage of Net Sales
                                                        2009         2008
     Independently owned natural products retailers     41%          41%
     Supernatural chains                                34%          32%
     Conventional supermarkets                          20%          22%
     Other                                               5%           5%

Compared to sales for the three months ended April 26, 2008, sales in the conventional supermarket channel for the three months ended May 2, 2009 were negatively impacted by customer losses within UNFI Specialty that were in process before our acquisition of Millbrook.

Gross Profit

Our gross profit increased approximately 1.8%, or $2.9 million, to $168.8 million for the three months ended May 2, 2009, from $165.8 million for the three months ended April 26, 2008. Our gross profit as a percentage of net sales was 19.0% and 18.7% for the three months ended May 2, 2009 and April 26, 2008, respectively. Gross profit as a percentage of net sales during the three months ended May 2, 2009 was positively impacted by sales from Albert's Organics and UNFI Specialty, partially offset by reduced fuel surcharge revenues.

We expect UNFI Specialty'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 through our Blue Marble Brands division, which we believe will allow us to generate higher gross margins over the long-term, as branded product revenues generally yield higher margins.

Operating Expenses

Our total operating expenses decreased approximately 1.9%, or $2.7 million, to $138.3 million for the three months ended May 2, 2009, from $141.0 million for the three months ended April 26, 2008. The decrease in total operating expenses for the three months ended May 2, 2009 was primarily due to lower diesel fuel costs as well as operational improvements and expense control programs across all of our divisions. During the quarter ended May 2, 2009, we incurred $1.2 million of labor and other duplicate expenses associated with the January 2009 relocation of our New Oxford, Pennsylvania facility to a new facility in York, Pennsylvania and the April 2009 relocation of our UNFI Specialty facility in East Brunswick, New Jersey to our newly leased facility in York, Pennsylvania. Total operating expenses for the three months ended May 2, 2009 and April 26, 2008 includes share-based compensation expense of $1.3 million and $1.1 million, respectively. See Note 2 to our condensed consolidated financial statements for a discussion of our share-based compensation expense.

As a percentage of net sales, total operating expenses decreased to approximately 15.6% for the three months ended May 2, 2009, from approximately 15.9% for the three months ended April 26, 2008. The decrease in total operating expenses as a percentage of net sales was primarily attributable to lower diesel fuel expenses and expense control programs across all of our divisions.

Operating Income

Operating income increased approximately 22.6%, or $5.6 million, to $30.4 million for the three months ended May 2, 2009 from $24.8 million for the three months ended April 26, 2008. As a percentage of net sales, operating income was 3.4% for the three months ended May 2, 2009, compared to 2.8% for the three months ended April 26, 2008. The increase in operating income as a percentage of net sales is attributable to the increase in gross margin as a percentage of sales, the smaller operating loss within UNFI Specialty as well as the decrease in total operating expenses as a percentage of net sales for the three months ended May 2, 2009, compared to the three months ended April 26, 2008.

Other Expense (Income)

Other expense (income) decreased $2.3 million to $1.9 million for the three months ended May 2, 2009, from $4.1 million for the three months ended April 26, 2008. Interest expense of $1.7 million for the three months ended May 2, 2009 represented a decrease of 58.9% from the three months ended April 26, 2008 due primarily to lower interest rates, as well as lower average debt levels during the three months ended May 2, 2009.

Provision for Income Taxes

Our effective income tax rate was 41.2% and 37.2% for the three months ended May 2, 2009 and April 26, 2008, respectively. The increase in the effective income tax rate was primarily due to the fiscal 2008 benefit of tax credits associated with the solar panel installation projects at our Rocklin, California and Dayville, Connecticut distribution facilities, as well as increases in state tax rates due to changes in apportionment factors. 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 increased $3.8 million to $16.8 million, or $0.39 per diluted share, for the three months ended May 2, 2009, compared to $13.0 million, or $0.30 per diluted share, for the three months ended April 26, 2008.

Nine Months Ended May 2, 2009 Compared To Nine Months Ended April 26, 2008

Net Sales

Our net sales increased approximately 6.0%, or $147.4 million, to $2,601 million for the nine months ended May 2, 2009, from $2,454 million for the nine months ended April 26, 2008. This increase was primarily due to organic sales growth in our wholesale segment of $129.0 million. Additionally, net sales from UNFI Specialty were $161.7 million for the nine months ended May 2, 2009, as compared to net sales of $149.6 million for the nine months ended April 26, 2008. We acquired UNFI Specialty on November 2, 2007, and our results for the nine months ended April 26, 2008 include amounts attributable to this business for only approximately six months. 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.

On a combined basis, and excluding sales to Henry's and Sun Harvest store locations, Whole Foods Market and Wild Oats Markets accounted for approximately 33% and 34% of our net sales for the nine months ended May 2, 2009 and April 26, 2008, respectively. Whole Foods Market is our only supernatural chain customer following its acquisition of Wild Oats Markets in August 2007.

The following table lists the percentage of sales by customer type for the nine months ended May 2, 2009 and April 26, 2008:

     Customer type                                   Percentage of Net Sales
                                                        2009         2008
     Independently owned natural products retailers     42%          42%
     Supernatural chains                                33%          34%
     Conventional supermarkets                          20%          20%
     Other                                               5%           4%

Gross Profit

Our gross profit increased approximately 9.3%, or $42.4 million, to $498.4 million for the nine months ended May 2, 2009, from $456.0 million for the nine months ended April 26, 2008. Our gross profit as a percentage of net sales was 19.2% and 18.6% for the nine months ended May 2, 2009 and April 26, 2008, respectively. Gross profit as a percentage of net sales during the nine months ended May 2, 2009 was positively impacted by sales from UNFI Specialty, as well as increased fuel surcharge revenues and an increased focus on enhancing efficiencies such as through forward buying by our purchasing teams. Gross profit as a percentage of net sales during the nine months ended April 26, 2008 was negatively impacted by missed forward buying opportunities in that period.

We expect UNFI Specialty's full service supermarket model to continue 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 through our Blue Marble Brands division, which we believe will allow us to generate higher gross margins over the long-term, as branded product revenues generally yield higher margins.

Operating Expenses

Our total operating expenses increased approximately 7.7%, or $29.7 million, to $417.1 million for the nine months ended May 2, 2009, from $387.4 million for the nine months ended April 26, 2008. The increase in total operating expenses for the nine months ended May 2, 2009 was primarily due to increases of approximately $14.7 million in infrastructure, diesel fuel and other distribution expenses in our wholesale segment to support our sales growth and UNFI Specialty's higher cost supermarket model. During the nine months ended May 2, 2009, we incurred $6.2 million of labor and other duplicate expenses associated with the September 2008 relocation of our Fontana, California facility to a new facility in Moreno Valley, California and the January 2009 relocation of our New Oxford, Pennsylvania facility and April 2009 relocation of our East Brunswick, New Jersey facility to a new facility in York, Pennsylvania. Total operating expenses for the nine months ended April 26, 2008 included $66.2 million of infrastructure and personnel costs within our wholesale segment as a result of our acquisition of UNFI Specialty and our continued sales growth, and . . .