UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark one)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~October~~March 724, ~~2018~~2019

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number: 001-36626

Smart & Final Stores, Inc.

(Exact name of registrant as specified in its charter)

Delaware		80-0862253
(State or other jurisdiction of		(I.R.S. Employer
Incorporation or organization)		Identification No.)
600 Citadel Drive
Commerce, California		90040
(Address of principal executive offices)		(Zip Code)

600 Citadel Drive
Commerce, California		90040
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (323) 869-7500

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No o

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer x Non-accelerated filer o Smaller reporting company ox Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock		SFS		New York Stock Exchange

Indicate the number of shares outstanding of each of the issuer’s classes of common units, as of the latest practicable date.

Class		Outstanding at ~~November~~April 1229, ~~2018~~2019
common stock, $0.001 par value		76,~~007~~489,~~689~~536

Table of Contents

TABLE OF CONTENTS

		~~PAGE~~	PAGE
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of October 7, 2018 (unaudited) and December 31, 2017	3
	Condensed Consolidated Balance Sheets as of March 24, 2019 (unaudited) and December 30, 2018		3
	Condensed Consolidated Statements of Operations and Comprehensive Income for the sixteen and forty weeks ended October 7, 2018 and October 8, 2017 (unaudited)	4
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the twelve weeks ended March 24, 2019 and March 25, 2018 (unaudited)		4
	Condensed Consolidated Statements of Cash Flows for the forty weeks ended October 7, 2018 and October 8, 2017 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the twelve weeks ended March 24, 2019 and March 25, 2018 (unaudited)		5
	Condensed Consolidated Statements of Stockholders’ Equity for the forty weeks ended October 7, 2018 (unaudited)	6
	Condensed Consolidated Statements of Stockholders’ Equity for the twelve weeks ended March 24, 2019 and March 25, 2018 (unaudited)		6
	Notes to Unaudited Condensed Consolidated Financial Statements	7	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23	26
	Forward-Looking Statements	23	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39	39
Item 4.	Controls and Procedures	39	39
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	40	40
Item 1A.	Risk Factors	40	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40	42
Item 3.	Defaults Upon Senior Securities	40	42
Item 4.	Mine Safety Disclosures	40	42
Item 5.	Other Information	40	42
Item 6.	Exhibits	40	42
Signatures		41	43

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Part I - FINANCIAL INFORMATION

Item 1. Financial Statements

Smart & Final Stores, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In Thousands, Except Share and Per Share Amounts)

	October 7, 2018			December 31, 2017
	March 24, 2019			December 30, 2018
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	6257,~~174~~872		$	7167,~~671~~217
Accounts receivable, less allowances of $177 and $177 at October 7, 2018 and December 31, 2017, respectively	37,937			33,019
Accounts receivable, less allowances of $100 and $100 at March 24, 2019 and December 30, 2018, respectively	37,786			36,771
Inventories	~~291~~286,~~963~~902			~~289~~301,~~712~~938
Prepaid expenses and other current assets	4125,~~135~~721			5432,~~241~~346
Total current assets	~~433~~408,~~209~~281			~~448~~438,~~643~~272
Property, plant, and equipment:
Land	811,~~816~~463			109,~~076~~734
Buildings and improvements	4756,~~943~~705			5360,~~965~~637
Leasehold improvements	~~367~~379,~~869~~685			~~346~~367,~~181~~820
Fixtures and equipment	~~447~~469,~~511~~350			~~421~~450,~~912~~267
Construction in progress	4416,~~023~~797			821,~~242~~784
	916,162			840,376
	934,000			910,242
Less accumulated depreciation and amortization	~~407~~465,~~276~~439			~~338~~428,~~149~~095
	508,886			502,227
	468,561			482,147
Assets under capital leases	~~13,535~~—			—16,862
Capitalized software, net of accumulated amortization of $19,570 and $17,325 at October 7, 2018 and December 31, 2017, respectively	29,957			21,984
Operating lease assets	886,091			—
Other intangible assets, net	357,306			362,536
Capitalized software, net of accumulated amortization of $21,902 and $20,294 at March 24, 2019 and December 30, 2018, respectively	35,089			33,725
Goodwill	385,918			385,918
Other intangible assets, net	310,722			355,554
Equity investment in joint venture	16,746			15,380
Goodwill	291,918			291,918
Other assets	83,002			73,249
Equity investment in joint venture	17,705			17,468
Total assets	$	1,828,559		$	1,809,937
Other assets	80,312			75,972
Total assets	$	2,498,679		$	1,711,918
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	~~235~~209,~~551~~453		$	~~245~~239,~~009~~668
Accrued salaries and wages	3437,~~227~~409			36,~~216~~757
Accrued expenses	~~111~~91,~~026~~289			~~100~~99,~~639~~317
Current portion of debt, less debt issuance costs	34,029			81,512
Current portion of operating and financing lease liabilities	77,486			—
Total current liabilities	414,833			463,376
Current portion of debt, less debt issuance costs	34,196			29,095
Obligations under capital leases	13,663			—
Total current liabilities	449,833			404,837
Long-term debt, less debt issuance costs	618,924			617,867
Obligations under capital leases	—			17,177
Deferred income taxes	39,487			38,095
Obligations under financing leases	22,229			—
Postretirement and postemployment benefits	118,796			127,649
Long-term operating lease liabilities	867,606			—
Other long-term liabilities	199,387			159,904
Long-term debt, less debt issuance costs	619,544			619,204
Deferred income taxes	46,942			50,365
Postretirement and postemployment benefits	116,067			115,402
Other long-term liabilities	82,867			196,778
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; Authorized shares — 10,000,000 Issued and outstanding shares — none	—			—
Preferred stock, $0.001 par value;
Authorized shares — 10,000,000; Issued and outstanding shares — none	—			—
Common stock, $0.001 par value;
Authorized shares — 340,000,000 Issued and outstanding shares - 75,987,863 and 74,120,113 at October 7, 2018 and December 31, 2017, respectively	76			74
Authorized shares — 340,000,000; Issued and outstanding shares - 76,522,262 and 76,524,061 at March 24, 2019 and December 30, 2018, respectively	77			77
Additional paid-in capital	~~517~~523,~~395~~868			~~506~~521,~~098~~183
Retained deficit	(68207,~~493~~503		)	(78190,~~160~~315		)
Accumulated other comprehensive loss	(2522,~~509~~851		)	(2422,~~966~~790		)
Total stockholders’ equity	~~423~~293,~~469~~591			~~403~~308,~~046~~155
Total liabilities and stockholders’ equity	$	12,~~828~~498,~~559~~679		$	1,~~809~~711,~~937~~918

See notes to unaudited condensed consolidated financial statements.

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Smart & Final Stores, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive ~~Income~~Loss

(Unaudited)

(In Thousands, Except Share and Per Share Amounts)

	Sixteen Weeks Ended						Forty Weeks Ended
	Twelve Weeks Ended
	October 7, 2018			October 8, 2017			October 7, 2018			October 8, 2017
	March 24, 2019			March 25, 2018
Net sales	$	1,~~497~~044,~~669~~802		$	1,~~457~~016,~~353~~237		$	~~3,639,390~~		$	~~3,502,657~~
Cost of sales, buying and occupancy	1888,~~265,220~~466			1869,~~243,490~~975			~~3,090,962~~			~~2,993,413~~
Gross margin	~~232~~156,~~449~~336			~~213~~146,~~863~~262			~~548,428~~			~~509,244~~
Operating and administrative expenses	~~209~~155,~~890~~038			~~195~~147,~~285~~430			~~507,892~~			~~474,021~~
Income from operations	22,559			18,578			40,536			35,223
Income (loss) from operations	1,298			(1,168		)
Interest expense, net	1310,~~250~~578			119,~~229~~251			~~32,165~~			~~27,738~~
Equity in earnings of joint venture	~~651~~433			~~362~~577			~~1,601~~			~~576~~
Income before income taxes	9,960			7,711			9,972			8,061
Loss before income taxes	(8,847		)	(9,842		)
Income tax benefit (provision)	200			(2,605		)	(305		)	(419		)
Income tax benefit	2,170			2,748
Net income	$	10,160		$	5,106		$	9,667		$	7,642
Net loss	$	(6,677	)	$	(7,094	)
Basic income per share	$	0.14		$	0.07		$	0.13		$	0.11
Basic loss per share	$	(0.09	)	$	(0.10	)
Diluted income per share	$	0.14		$	0.07		$	0.13		$	0.10
Diluted loss per share	$	(0.09	)	$	(0.10	)
Weighted average shares outstanding:
Basic	73,~~117~~867,~~389~~084			72,~~446~~231,~~404~~171			~~72,713,906~~			~~72,437,033~~
Diluted	7473,~~446~~867,~~660~~084			7472,~~253~~231,~~374~~171			~~74,071,704~~			~~75,588,182~~
Comprehensive income:
Comprehensive loss:
Net income	$	10,160		$	5,106		$	9,667		$	7,642
Net loss	$	(6,677	)	$	(7,094	)
Derivative instruments:
(Loss) gain, net of income tax expense (benefit) of $0 and $127, respectively, for sixteen weeks ended; $(51) and $398, respectively, for forty weeks ended	—			190			(138		)	596
Loss, net of income tax benefit of $(48) at March 25, 2018	—			(133		)
Reclassification adjustments, net of income tax expense of $0 and $4, respectively, for sixteen weeks ended; $6 and $10, respectively, for forty weeks ended	—			6			15			14
Reclassification adjustments, net of income tax expense of $5 at March 25, 2018	—			15
Foreign currency translation	(~~514~~61		)	~~122~~(291		)	~~(420~~		)	~~278~~
Other comprehensive (loss) income	(514		)	318			(543		)	888
Other comprehensive loss	(61		)	(409		)
Comprehensive income	$	9,646		$	5,424		$	9,124		$	8,530
Comprehensive loss	$	(6,738	)	$	(7,503	)

See notes to unaudited condensed consolidated financial statements.

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Smart & Final Stores, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In Thousands)

	Forty Weeks Ended
	Twelve Weeks Ended
	October 7, 2018			October 8, 2017
	March 24, 2019			March 25, 2018
Operating activities
Net income	$	9,667		$	7,642
Net loss	$	(6,677	)	$	(7,094	)
Adjustments to reconcile net income to net cash provided by operating activities:
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation	4412,~~953~~714			4413,~~526~~880
Amortization	3110,~~293~~698			309,~~522~~412
Amortization of debt discount and debt issuance costs	~~1,601~~472			~~1,485~~459
Share-based compensation	102,~~057~~703			83,~~504~~285
Deferred income taxes	~~1,439~~(628		)	(~~506~~257		)
Equity in earnings of joint venture	(~~1,601~~433		)	(~~576~~577		)
Loss (Gain) on disposal of property, plant, and equipment	559			(50		)
Loss (gain) on disposal of property, plant, and equipment	85			(32		)
Asset impairment	~~3,182~~322			1,~~430~~425
Changes in operating assets and liabilities:
Accounts receivable, net	(41,~~918~~015		)	(3,~~858~~452		)
Inventories	(215,~~251~~036		)	71,~~391~~972
Prepaid expenses and other assets	126,~~672~~494			167,~~404~~520
Accounts payable	(9,458		)	(758		)
Operating lease assets	17,528			—
Accrued salaries and wages	(1,989		)	3,240
Accounts payable	(30,215		)	(24,319		)
Other accrued liabilities	14,251			12,644
Accrued salaries and wages	652			(5,140		)
Net cash provided by operating activities	109,457			128,040
Operating lease liabilities	(19,653		)	—
Other accrued liabilities	3,968			14,209
Net cash provided by operating activities	12,051			18,195
Investing activities
Purchases of property, plant, and equipment	(9522,~~891~~208		)	(~~107~~25,~~078~~478		)
Proceeds from disposal of property, plant, and equipment	33137			~~1,850~~33
Investment in capitalized software	(113,~~846~~899		)	(103,~~505~~523		)
Other	(~~231~~167		)	(~~579~~19		)
Net cash used in investing activities	(~~107~~26,~~935~~137		)	(~~116~~28,~~312~~987		)
Financing activities
Proceeds from exercise of stock options	~~1,885~~27			~~3,780~~336
Payment of minimum withholding taxes on net share settlement of share-based compensation awards	(~~645~~45		)	(~~1,826~~65		)
Fees paid in conjunction with debt financing	(~~180~~31		)	(~~154~~31		)
Borrowings on bank line of credit	4736,000			6327,000
Payments on bank line of credit	(9331,000		)	(5739,000		)
Payment on promissory note	(1,775		)	—
Principal payments on finance leases	(210		)	—
Cash received from landlord related to financing lease obligations	~~35,696~~—			—6,671
Stock repurchases	—			(12,873		)
Net cash provided by (used in) financing activities	4,741			(5,089		)
Net cash used in financing activities	(11,019		)	(5,073		)
Net decrease in cash and cash equivalents	(9,345		)	(15,881		)
Net (decrease) increase in cash and cash equivalents	(9,497		)	6,655
Cash and cash equivalents at beginning of period	67,217			71,671
Cash and cash equivalents at beginning of period	71,671			54,235
Cash and cash equivalents at end of period	$	57,872		$	55,790
Cash and cash equivalents at end of period	$	62,174		$	60,890
Cash paid during the period for:
Interest	$	296,~~171~~720		$	261,~~191~~116
Income taxes	—			—
Non-cash investing and financing activities
Software development costs incurred but not paid	$	31,~~508~~509		$	~~331~~2,115
Construction in progress costs incurred but not paid	1812,~~511~~752			2614,~~093~~888
Property acquired through capital and financing lease obligations	14,369			—
Property acquired through financing lease obligations	—			232

See notes to unaudited condensed consolidated financial statements.

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Smart & Final Stores, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(In Thousands, Except Share Amounts)

											Accumulated
	Common Stock				Additional						Other
	Number				Paid-In			Retained			Comprehensive
	of Shares		Amount		Capital			Deficit			Loss			Total
Balance at December 31, 2017	74,120,113		$	74	$	506,098		$	(78,160	)	$	(24,966	)	$	403,046
Issuance of restricted stock awards	1,370,576		1		—			—			—			1
Forfeiture of restricted stock awards	(1,045	)	—		—			—			—			—
Forfeiture of restricted stock awards	(25,334	)	—		—			—			—			—
Share-based compensation	—		—		3,285			—			—			3,285
Share-based compensation	—		—		10,057			—			—			10,057
Stock option exercises	101,471		—		336			—			—			336
Stock option exercises	635,388		1		1,885			—			—			1,886
Vested restricted stock awards withheld on net share settlement	(8,324	)	—		(65		)	—			—			(65		)
Vested restricted stock awards withheld on net share settlement	(112,880	)	—		(645		)	—			—			(645		)
Net loss	—		—		—			(7,094		)	—			(7,094		)
Net income	—		—		—			9,667			—			9,667
Other comprehensive loss	—		—		—			—			(409		)	(409		)
Other comprehensive loss	—		—		—			—			(543		)	(543		)
Balance at March 25, 2018	74,212,215		$	74	$	509,654		$	(85,254	)	$	(25,375	)	$	399,099
Balance at October 7, 2018	75,987,863		$	76	$	517,395		$	(68,493	)	$	(25,509	)	$	423,469

See notes to condensed consolidated financial statements.

											Accumulated
	Common Stock				Additional						Other
	Number				Paid-In			Retained			Comprehensive
	of Shares		Amount		Capital			Deficit			Loss			Total
Balance at December 30, 2018	76,524,061		$	77	$	521,183		$	(190,315	)	$	(22,790	)	$	308,155
Share-based compensation	—		—		2,703			—			—			2,703
Stock option exercises	5,130		—		27			—			—			27
Vested restricted stock awards withheld on net share settlement	(6,929	)	—		(45		)	—			—			(45		)
Net loss	—		—		—			(6,677		)	—			(6,677		)
Adoption of ASU No. 2016-02, Leases (Topic 842)								(10,511		)				(10,511		)
Other comprehensive loss	—		—		—			—			(61		)	(61		)
Balance at March 24, 2019	76,522,262		$	77	$	523,868		$	(207,503	)	$	(22,851	)	$	293,591

See notes to unaudited condensed consolidated financial statements.

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Smart & Final Stores, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

1. Description of Business and Basis of Presentation

Business

Smart & Final Stores, Inc., a Delaware corporation (“SFSI” and, collectively with its wholly owned consolidated subsidiaries, the “Company”), is engaged primarily in the business of selling fresh perishables and everyday grocery items, together with foodservice, packaging and janitorial products. The Company operates non-membership, warehouse-style stores offering products in a range of product sizes.

SFSI was formed in connection with the acquisition of the “Smart & Final” and “Smart Foodservice” store businesses through the purchase of all of the outstanding common stock of Smart & Final Holdings Corp., a Delaware corporation (the “Predecessor”), on November 15, 2012. The principal acquiring entities were affiliates of Ares Management, L.P. (“Ares”) and the acquisition is referred to as the “Ares Acquisition.”

The Company operates non-membership warehouse-style grocery stores under the “Smart & Final” banner and the “Smart Foodservice” banner. As of ~~October~~March 724, ~~2018~~2019, the Company operated ~~324~~327 stores throughout the Western United States (“U.S.”).

The Company owns a 50% joint venture interest in a Mexican domestic corporation, Smart & Final del Noroeste, S.A. de C.V. (“SFDN”), which operated 15 “Smart & Final” format stores in northwestern Mexico as of ~~October~~March 724, ~~2018~~2019.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial statements, and Rule 108-0103 of Regulation S-X of the Securities Act of 1933, as amended (the “Securities Act”). The unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the periods indicated. All intercompany accounts and transactions have been eliminated in consolidation. Interim results are not necessarily indicative of results for a full fiscal year. The information included in these unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited consolidated financial statements as of and for the fiscal year ended December 3130, ~~2017~~2018 that were included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 1615, ~~2018~~2019.

Fiscal Years

The Company’s fiscal year is the 52- or 53-week period that ends on the Sunday closest to December 31. Each fiscal year typically consists of twelve-week periods in the first, second and fourth quarters and a sixteen-week period in the third quarter. Fiscal year ~~2018~~2019 is, and fiscal year ~~2017~~2018 was, a 52-week fiscal year.

2. Significant Accounting Policies

Cash and Cash Equivalents

The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. All credit card, debit card and electronic benefits transfer transactions that process in less than seven days are classified as cash equivalents. The carrying amount of cash equivalents is approximately the same as their respective fair values due to the short-term maturity of these instruments.

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Accounts Receivable, Net

Accounts receivable generally represent billings to customers, billings to vendors for earned rebates and allowances, receivables from SFDN, and other items. The receivable from SFDN primarily relates to billings for the shipment of inventory product to SFDN.

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The Company evaluates the collectability of accounts receivable and determines the appropriate reserve for doubtful accounts based on analysis of historical trends of write-offs and recoveries on various levels of aged receivables. When the Company becomes aware of the deteriorated collectability of a specific account, additional reserves are made to reduce the net recognized receivable to the amount reasonably expected to be collectible or zero. When the specific account is determined to be uncollectible, the net recognized receivable is written off in its entirety against such reserves.

The Company is exposed to credit risk on trade accounts receivable. The Company provides credit to certain trade customers in the ordinary course of business and performs ongoing credit evaluations. Concentrations of credit risk with respect to trade accounts receivable are limited due to the number of customers comprising the Company’s customer base. The Company currently believes the allowance for doubtful accounts is sufficient to cover customer credit risks.

Inventories

Inventories consist of merchandise purchased for resale which is stated at the lower of weighted-average cost (which approximates first-in, first-out (“FIFO”)) or net realizable value. The Company provides for estimated inventory losses between physical inventory counts at its stores based upon historical inventory losses as a percentage of sales. The provision is adjusted periodically to reflect updated trends of actual physical inventory count results.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets include primarily prepaid ~~rent,~~ insurance, property taxes, income taxes receivable, properties held for sale and other current assets.

As of ~~October~~March 724, 2019 and December 30, 2018, the Company designated properties as held for sale in the amount of $1112.03 million and $8.5 million, respectively.

Property, Plant, and Equipment

Property, plant, and equipment is stated at cost less accumulated depreciation and depreciated or amortized using the straight-line method. Leased property meeting certain criteria is capitalized and the amortization is based on the straight-line method over the term of the lease.

The estimated useful lives are as follows:

Buildings and improvements		20 - 25 years
Fixtures and equipment		3 - 10 years
Leasehold improvements		Lesser of lease term or useful life of improvement

Costs of normal maintenance and repairs and minor replacements are charged to expense when incurred. Major replacements, remodeling or betterments of properties are capitalized. When assets are sold or otherwise disposed of, the costs and related accumulated depreciation and amortization are removed from the accounts, and any resulting gain or loss is included in the condensed consolidated statements of operations and comprehensive ~~income~~loss.

Included in property, plant, and equipment are costs associated with the selection and procurement of real estate sites. These costs are amortized over the remaining lease term of the successful sites with which they are associated.

The Company reviews its long-lived assets, including property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company groups and evaluates long-lived assets for impairment at the individual store level, which is the lowest level at which individual cash flows can be identified. The Company regularly reviews its stores’ operating performance for indicators of impairment. Factors it considers important that could trigger an impairment review include a significant underperformance relative to expected historical or projected future operating results, a significant change in the manner of the use of the asset or a significant negative industry or economic trend. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized to the extent the sum of the estimated discounted future cash flows from the use of the asset is less than the carrying value. The Company measured the fair value of its long-lived assets on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy. See Note 5 6, Fair Value Measurements. As a result of such reviews, the Company recorded a pre-tax impairment loss of $0.1 million and $1.2 million for the quarter ended March 24, 2019 and March 25, 2018, respectively, in the Smart & Final segment. The impairment loss was reported within “operating and administrative expenses” on the Company’s condensed consolidated statements of operations and comprehensive loss.

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Capitalized Software

Capitalized software costs are comprised of third-party purchased software costs, capitalized costs associated with internally developed software including internal direct labor costs, and installation costs. Such capitalized costs are amortized over the period that the benefits of the software are fully realizable and enhance the operations of the business, ranging from three to seven years, using the straight-line method.

Capitalized software costs, like other long-lived assets, are subject to review for impairment whenever events or changes in circumstances indicate that the carrying amount of the capitalized software may not be recoverable, whether it is in use or under development. Impairment is recognized to the extent the sum of the estimated discounted future cash flows from the use of the capitalized software is less than the carrying value.

Goodwill and Intangible Assets

Goodwill and intangible assets with indefinite lives are evaluated on an annual basis for impairment during the fourth quarter, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The Company evaluates goodwill for impairment by comparing the fair value of each reporting unit to its carrying value including the associated goodwill. The Company has designated its reporting units to be its Smart & Final stores and Smart Foodservice stores. The Company determines the fair value of the reporting units using the income approach methodology of valuation that includes the discounted cash flow method as well as other generally accepted valuation methodologies. If the fair value of the reporting unit exceeds the carrying value of the net assets, including goodwill assigned to that unit, goodwill is not impaired. If the carrying value of the reporting unit’s net assets, including goodwill, exceeds the fair value of the reporting unit, an impairment charge is recognized for the amount by which that carrying amount exceeds the fair value of the reporting unit.

The Company evaluates its indefinite-lived intangible assets associated with trade names by comparing the fair value of each trade name with its carrying value. The Company determines the fair value of the indefinite-lived trade names using a “relief from royalty payments” methodology. This methodology involves estimating reasonable royalty rates for each trade name and applying these royalty rates to a revenue stream and discounting the resulting cash flows to determine fair value.

~~During~~Through ~~2017~~the fourth quarter of 2018, the Company experienced a sustained decline in its share price and market capitalization. Additionally, the market multiples of publicly traded peer companies also experienced a sustained decline over this time period reflecting an increasingly competitive environment. As a result of the changed market conditions the Company further updated its short-term operating plan in the fourth quarter ~~2017~~2018 to reflect this environment. The annual evaluation of impairment for fiscal year ~~2017~~2018 was performed as of December 32, ~~2017~~2018 resulting in a goodwill impairment charge of $~~180~~94.0 million associated with the Smart & Final reporting unit recorded in the fourth quarter of ~~2017~~2018. As of March 24, 2019, there were no events or conditions that would require an additional impairment test.

The finite-lived intangible assets are amortized over their estimated useful benefit period and have the following weighted-average amortization periods:

Signature brands		20 years
Leasehold interests		24 years

Finite-lived intangible assets, like other long-lived assets are subject to review for impairment whenever events or changes in circumstances indicate that the carrying amount of the finite-lived intangible asset may not be recoverable. Impairment is recognized to the extent the sum of the discounted estimated future cash flows from the use of the finite-lived intangible asset is less than the carrying value.

Other Assets

Other assets primarily consist of assets held in trusts for certain retirement plans (see Note 67, Retirement Benefit Plans and Postretirement and Postemployment Benefit Obligations), insurance recovery receivables related to self-insurance, liquor licenses, capitalized cloud computing ~~implementation~~ costs, ~~liquor licenses~~ and other miscellaneous assets.

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Accounts Payable

The Company’s banking arrangements provide for the daily replenishment and limited monthly advanced payments of vendor payable accounts as checks are presented or payments are demanded. The checks and the advanced payments outstanding in these bank accounts are included in “Accounts payable” in the accompanying condensed consolidated balance sheets.

Other Long-Term Liabilities

Other long-term liabilities include primarily general liability reserves, workers’ compensation reserves, liabilities for the deferred compensation plan, ~~leasehold interests,~~ financing obligations for “build-to-suit” lease arrangements, and other miscellaneous long-term liabilities. ~~These leasehold interests are amortized over their estimated useful benefit periods, which is typically the lease term. The weighted-average amortization period is 14 years.~~

Impact of Adoption of ASU 2016-02 on Lease Accounting

~~Certain~~In ofFebruary 2016, the ~~Company’s~~Financial ~~operating~~Accounting ~~leases~~Standards ~~provide~~Board ~~for~~(“FASB”) ~~minimum~~issued ~~annual~~ASU ~~payments~~No. 2016-02, ~~that~~Leases ~~increase~~(Topic ~~over the life of the lease~~842). ~~The~~This ~~aggregate~~pronouncement ~~minimum~~requires ~~annual~~lessees ~~payments are charged~~ to ~~expense~~recognize on a ~~straight-line~~liability ~~basis~~for ~~beginning~~lease ~~when~~obligations, ~~the~~which ~~Company~~represents ~~takes possession of~~ the ~~property~~discounted ~~and~~obligation ~~extending~~to ~~over~~make ~~the~~future ~~term of the related~~ lease. ~~The~~payments, ~~amount~~and bya ~~which~~corresponding ~~straight~~right-~~line~~of-use ~~rent~~asset ~~expense~~on ~~exceeds actual lease payment requirements in~~ the ~~early~~balance ~~years~~sheet. ofWe ~~the~~adopted ~~leases~~ASU is2016-02, ~~accrued~~along aswith ~~deferred~~related ~~minimum~~clarifications ~~rent~~ and ~~reduced~~improvements, inas ~~later~~of ~~years~~December 31, ~~when~~2018, using the ~~actual~~modified ~~cash~~retrospective ~~payment~~approach, ~~requirements~~which ~~exceed~~allows ~~the~~us ~~straight-line~~to ~~expense.~~apply Accounting ~~guidance~~Standards ~~for~~Codification ~~asset~~(“ASC”) ~~retirement~~840, ~~obligations~~Leases, ~~requires~~in anthe ~~entity~~comparative toperiods ~~recognize~~presented ain ~~liability for~~ the ~~fair~~year ~~value~~ of aadoption. ~~conditional~~The ~~asset~~cumulative ~~retirement~~effect ~~obligation if the fair value~~ of ~~the~~adoption ~~liability~~was ~~can~~recorded beas ~~reasonably~~an ~~estimated.~~adjustment ~~Due~~ to the ~~nature~~opening balance of ~~the~~retained ~~Company’s~~deficit ~~business,~~in ~~its~~the ~~asset~~period ~~retirement~~of ~~obligation with respect to owned or leased properties is not significant~~adoption.

The Company ~~records~~elected anto ~~asset~~use ~~and~~the ~~related~~package ~~financing~~of ~~lease~~practical ~~obligation~~expedients ~~for~~which permitted the ~~estimated~~Company ~~construction~~to ~~costs~~not ~~under~~reassess: ~~“build-to-suit”~~(i) whether ~~lease~~a ~~arrangements~~contract ~~where~~is itor iscontains ~~considered~~a lease, in(ii) lease ~~substance~~classification, toand be(iii) initial ~~the~~direct ~~owner~~costs ofresulting from the ~~building~~lease. ~~due~~We tohave not elected the ~~Company’s~~hindsight ~~involvement~~practical inexpedient, ~~the~~which ~~building’s~~permits ~~construction.~~the ~~Upon~~use ~~occupancy~~of ~~and~~hindsight ~~shortly~~when ~~thereafter,~~determining ~~the~~lease ~~Company~~term ~~assesses~~and ~~whether~~impairment ~~these~~of ~~arrangements~~operating ~~qualify~~lease ~~for~~assets. ~~sales~~We ~~recognition~~elected ~~under~~to apply the ~~sale~~short-~~leaseback~~term ~~accounting~~lease ~~guidance.~~exception, Ifwhich allows the Company ~~continues~~ to bekeep ~~deemed~~leases ~~the~~with ~~owner~~terms of ~~the~~12 ~~building,~~months or less off the balance sheet. The Company ~~will~~also ~~continue~~elected to ~~account~~combine ~~for~~lease ~~the~~and ~~arrangement~~non-lease components as a ~~financing~~single component for our entire population of lease assets.

Adoption of the new standard resulted in the recording of net lease assets and lease liabilities of approximately $922.3 million and $972.0 million, respectively, as of December 31, 2018. The $49.7 million difference in the lease liabilities and net lease assets represents the net ASC 840 lease liabilities at year-end 2018 that were netted against the initial right-of-use-asset, which included: straight-line rent, lease intangibles assets, closed store reserves and deferred gains on sale-leaseback transactions. The $10.5 million transition adjustment to retained earnings was comprised of $6.6 million of build-to-suit financing lease assets that were derecognized and recorded as operating leases in transition, $6.7 million of initial impairment to right-of-use-assets, which were partially offset by the related deferred tax effect of $2.8 million. Adoption of ASU 2016-02 did not materially impact our consolidated net earnings, or our cash flows, and did not have a notable impact on our liquidity or debt-covenant compliance under our current agreements.

Store Opening and Closing Costs

New store opening costs consisting primarily of rent, store payroll and general operating costs are charged to expense as incurred prior to the store opening.

In the event a leased store is closed before the expiration of the associated lease, ~~the discounted remaining lease obligation less estimated sublease rental income,~~ asset impairment charges related to improvements and fixtures, inventory write-downs and other miscellaneous closing costs associated with the disposal activity are recognized when the store closes.

Share-Based Compensation

All share-based payments are recognized over the requisite service period in the condensed consolidated statements of operations and comprehensive ~~income~~loss as compensation expense based on the fair value of an award, taking into consideration estimated forfeiture rates.

The Company measures share-based compensation cost at the grant date based on the fair value of the award and recognizes share-based compensation cost as an expense over the award’s vesting period. As share-based compensation expense recognized in the ~~condensed~~ consolidated statements of operations and comprehensive ~~income~~loss of the Company is based on awards ultimately expected to vest, the amount of expense has been reduced for estimated forfeitures. The Company’s forfeiture rate assumption used in determining its share-based compensation expense is estimated primarily based upon historical data. The actual forfeiture rate could differ from these estimates.

The Company uses the Black-Scholes-Merton option-pricing model to determine the grant date fair value for each stock option grant. The Black-Scholes-Merton option-pricing model requires extensive use of subjective assumptions. Application of alternative assumptions could produce significantly different estimates of the fair value of share-based compensation and, consequently, the related amounts recognized in the Company’s condensed consolidated statements of operations and comprehensive income. The Company recognizes compensation cost for graded vesting awards as if they were granted in multiple awards. Management believes the use of this “multiple award” method is preferable because a stock option grant or restricted stock grant with graded vesting is effectively a series of individual grants that vest over various periods and management believes that this method provides for better matching of compensation costs with the associated services rendered throughout the applicable vesting periods. See Note 8, Share-Based Compensation.

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consequently, the related amounts recognized in the Company’s consolidated statements of operations and comprehensive loss. The Company recognizes compensation cost for graded vesting awards as if they were granted in multiple awards. Management believes the use of this “multiple award” method is preferable because a stock option grant or restricted stock grant with graded vesting is effectively a series of individual grants that vest over various periods and management believes that this method provides for better matching of compensation costs with the associated services rendered throughout the applicable vesting periods. See Note 9, Share-Based Compensation.

Significant Accounting Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions. Such estimates and assumptions could affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

Revenues from the sale of products are recognized at the point of sale. Discounts provided to customers at the time of sale are recognized as a reduction in sales as the products are sold. Returns are also recognized as a reduction in sales and are immaterial in relation to total sales. The Company collects sales tax on taxable products purchased by its customers and remits such collections to the appropriate taxing authority in accordance with local laws. Sales tax collections are presented in the condensed consolidated statements of operations and comprehensive ~~income~~loss on a net basis and, accordingly, are excluded from reported revenues.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which amended the existing accounting standards for revenue recognition. ASU 2014-09 establishes principles for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. The Company adopted ASU 2014-09 in the first quarter of 2018 using the modified retrospective approach. Because the Company’s primary source of revenues is from the sale of products which are recognized at the point of sale, the impact on its consolidated financial statements is not material.

In March 2016, the FASB issued ASU No. 2016-08, Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net) (“ASU 2016-08”), which amended existing accounting standards for revenue recognition. The Company adopted ASU 2016-08 in the first quarter of 2018 using the modified retrospective approach. The Company performed a detailed review of key contracts and comparison of historical accounting policies and practices to the new standard including principal versus agent considerations as amended through ASU 2016-08. The Company’s analysis of its contracts under the new standard supports the recognition of revenue at the point of sale, consistent with its current revenue policy. Furthermore, the Company evaluated the principal versus agent considerations as it relates to certain arrangements with third parties and determined that there would be no impact to the presentation of gross or net revenue reporting.

Proceeds from the sale of the Company’s Smart & Final gift cards are recorded as a liability at the time of sale, and recognized as sales when they are redeemed by the customer. The Smart & Final gift cards do not have an expiration date and the Company is not required to escheat the value of unredeemed gift cards in the applicable jurisdictions. The Company has determined a gift card breakage rate based upon historical redemption patterns. Estimated breakage amounts are accounted for under the redemption recognition method, which results in recognition of estimated breakage income in proportion to actual gift card redemptions.

Cost of Sales, Buying and Occupancy

The major categories of costs included in cost of sales, buying and occupancy are cost of goods, distribution costs, costs of the Company’s buying department and store occupancy costs, net of earned vendor rebates and other allowances. Distribution costs consist of all warehouse receiving and inspection costs, warehousing costs, all transportation costs associated with shipping goods from the Company’s warehouses to its stores, and other costs of its distribution network. The Company does not exclude any material portion of these costs from cost of sales.

Vendor Rebates and Other Allowances

As a component of the Company’s consolidated procurement program, the Company frequently enters into contracts with vendors that provide for payments of rebates or other allowances. These vendor payments are reflected in the carrying value of the inventory when earned or as progress is made toward earning the rebate or allowance and as a component of cost of sales as the inventory is sold. Certain of these vendor contracts provide for rebates and other allowances that are contingent upon the Company meeting specified performance measures such as a cumulative level of purchases over a specified period of time. Such contingent rebates and other allowances are given accounting recognition at the point at which achievement of the specified performance measures are deemed to be probable and reasonably estimable.

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Operating and Administrative Expenses

The major categories of operating and administrative expenses include store direct expenses associated with displaying and selling at the store level, primarily labor and related fringe benefit costs, advertising and marketing costs, overhead costs and corporate office costs. ~~The Company charges to expense the costs of advertising as incurred.~~

Income Taxes

The Company recognizes deferred tax assets and liabilities based on the liability method, which requires an adjustment to the deferred tax asset or liability to reflect income tax rates currently in effect. When income tax rates increase or decrease, a corresponding adjustment to income tax expense is recorded by applying the rate change to the cumulative temporary differences. The Company also determines whether it is “more likely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recognized.

Foreign Currency Translations

The Company’s joint venture in Mexico uses the Mexican Peso as its functional currency. The joint venture’s assets and liabilities are translated into U.S. dollars at the exchange rates prevailing at the balance sheet dates. Revenue and expense accounts are translated into U.S. dollars at average exchange rates during the year. Foreign exchange translation adjustments are included in “Accumulated other comprehensive loss” (“AOCL”), which is reflected as a separate component of stockholders’ equity, in the accompanying condensed consolidated balance sheets.

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Derivative Financial Instruments

The Company uses interest rate swaps to manage a portion of its exposure to adverse fluctuations in interest rates. The contracts are accounted for in accordance with accounting guidance for derivatives and hedging, which requires every derivative instrument to be recorded in the Company’s consolidated balance sheets as either an asset or liability measured at its fair value. The Company designates its interest rate swaps as cash flow hedges and formally documents its hedge relationships, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. Accordingly, changes in estimated fair value related to the interest rate swaps are recognized in AOCL in the condensed consolidated statements of stockholders’ equity and recognized in Foreign Currency Translation (“FCT”) in the condensed consolidated statements of operations and comprehensive income when the hedged items affect earnings. The Company’s interest rate swap agreement expired on March 29, 2018.

Debt Discount and Debt Issuance Costs

Costs incurred in connection with the placement of long-term debt paid directly to the Company’s lenders are treated as a debt discount. Costs incurred in connection with the placement of long-term debt paid to third parties are treated as debt issuance costs and are amortized to interest expense over the term of the related debt using the effective interest method.

The Company presents capitalized debt issuance costs in its condensed consolidated balance sheets as a direct reduction to debt.

Self-Insurance

The Company has various insurance programs related to its risks and costs associated with workers’ compensation and general liability claims. The Company has elected to purchase third-party insurance to cover the risk in excess of certain dollar limits established for each respective program. The Company establishes estimated accruals for its insurance programs based on available claims data, historical trends and experience, and projected ultimate costs of the claims. These accruals are based on estimates prepared with the assistance of outside actuaries and consultants, and the ultimate cost of these claims may vary from initial estimates and established accruals. The actuaries periodically update their estimates and the Company records such adjustments in the period in which such determination is made. Included in the aggregate accrual are amounts related to the risk in excess of certain dollar limits related to the Company’s workers’ compensation California self-insured program and its general liability program. The Company has also recorded a corresponding insurance recovery receivable from its third-party insurance carriers related to the risk in excess of certain reinsurance dollar limits related to such programs. The accrued obligation for these self-insurance programs and the corresponding insurance recovery receivable are included in “Other long-term liabilities” and “Other ~~Assets~~assets,” respectively, in the condensed consolidated balance sheets.

Fair Value of Financial Instruments

The Company’s financial instruments recorded in the condensed consolidated balance sheets include cash and cash equivalents, accounts receivable, derivatives, investments in affiliates, accounts payable, accrued expenses and long-term variable rate debt. The carrying amounts of cash and cash equivalents, accounts receivable, derivatives, equity investment in joint venture, accounts payable and accrued expenses approximate fair value.

The Company’s debt is not listed or traded on an established market. For the purpose of determining the fair value of the Company’s first lien term loan facility (as amended, the “Term Loan Facility”), the administrative agent has provided to the Company the fair value of the Term Loan Facility based upon orderly trading activity and related closing prices for actual trades of the Term Loan Facility as well as indications of interest by prospective buyers and sellers and related bid/ask prices. As of ~~October~~March 724, ~~2018~~2019, the carrying value of the Term Loan Facility approximates fair value based upon valuations received from the administrative agent, which reflected a pricing valuation of 97.5% of carrying value. The carrying value of the Term Loan Facility was $625.0 million, compared to an indicated fair value of $609.4 million as of October 7, 2018. The Company’s estimates of the fair value of long-term debt were classified as Level 2 in the fair value hierarchy.

The Company’s condensed consolidated financial statements reflect its investment in Sprouts Farmers Market, Inc. (“Sprouts”) through the Company’s supplemental deferred compensation plan. The investment is presented at fair market value.

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reflected a pricing valuation of 95.25% of carrying value. The carrying value of the Term Loan Facility was $625.0 million, compared to an indicated fair value of $595.3 million as of March 24, 2019. The Company’s estimates of the fair value of long-term debt were classified as Level 2 in the fair value hierarchy.

The Company’s condensed consolidated financial statements reflect its investment in Sprouts Farmers Market, Inc. (“Sprouts”), through the Company’s supplemental deferred compensation plan. The investment is presented at fair market value.

Accounting for Retirement Benefit Plans

The Company recognizes the overfunded or underfunded status of a defined benefit plan, measured as the difference between the fair value of plan assets and the plan’s benefit obligation, as an asset or liability in its condensed consolidated balance sheets and recognizes changes to that funded status in the year in which the changes occur through accumulated other comprehensive loss. Measurement of the funded status of a plan is required as of the Company’s consolidated balance sheet dates.

~~Earnings~~Loss per Share

Basic ~~earnings~~loss per share is calculated by dividing net ~~income~~loss by the weighted average number of shares outstanding during the fiscal period.

Diluted ~~earnings~~loss per share is calculated by dividing net ~~income~~loss by the weighted average number of shares outstanding ~~for~~during the ~~applicable~~fiscal period~~, inclusive of the effect of dilutive securities such as outstanding stock options and unvested restricted stock~~.

Potentially dilutive securities representing 5,304,930 shares of Common Stock for the twelve weeks ended March 24, 2019 and 6,266,238 shares of Common Stock for the twelve weeks ended March 25, 2018 were excluded from the computation of diluted loss per share because their effect would have been antidilutive.

3. Recent Accounting Pronouncements

Recently Issued Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 will require organizations that lease assets, referred to as “lessees”, to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. A lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a financing or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, ASU 2016-02 will require both types of leases to be recognized on the balance sheet. As a result, lessees will be required to put most leases on their balance sheets while recognizing expense on their income statements in a manner similar to current accounting. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company anticipates that the adoption of ASU 2016-02 will materially affect its consolidated balance sheets, with no material impact to its consolidated statements of operations. The Company is implementing changes to its systems and processes in conjunction with its review of existing lease agreements. The Company plans to use the optional transition method allowed by ASU 2016-02, which allows the Company to apply Accounting Standards Codification (“ASC”) 840, Leases, in the comparative periods presented in the year of adoption. The cumulative effect of adoption would be recorded in the opening balance sheet in the period of adoption. The Company also plans to elect to use the package of practical expedients which permits the Company to not reassess whether: a contract is or contains a lease, lease classification, and initial direct costs. The adoption of ASU 2016-02 is expected to result in a material increase to the Company’s condensed consolidated balance sheets for right-of-use assets and lease liabilities and enhanced disclosures.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 replaces the incurred loss impairment methodology under current GAAP. The new guidance requires immediate recognition of estimated credit losses expected to occur for most financial assets and certain other instruments. For available-for-sale debt securities with unrealized losses, the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. It is effective for annual reporting periods beginning after December 15, 2019 and interim periods within those annual periods. Early adoption for annual reporting periods beginning after December 15, 2018 is permitted. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period. The Company is currently evaluating this guidance and the impact it will have on its consolidated financial statements.

In August ~~2017~~2018, the FASB issued ASU ~~2017~~No. 2018-1213, ~~Derivatives~~Fair ~~and~~Value ~~Hedging~~Measurement (Topic ~~815~~820):, ~~Targeted~~Disclosure ~~Improvements~~Framework — Changes to ~~Accounting~~the Disclosure Requirements for ~~Hedging~~Fair ~~Activities~~Value Measurement (“ASU ~~2017~~2018-1213”). ~~The~~ASU ~~new~~2016-13 ~~guidance~~eliminates, ~~amends~~adds ~~the~~and ~~hedge~~modifies ~~accounting~~certain ~~model~~disclosure torequirements ~~enable~~for ~~entities~~fair tovalue ~~better~~measurements. ~~portray~~For ~~the~~example, ~~economics~~entities ofwill ~~their~~no ~~risk~~longer ~~management~~have ~~activities~~to indisclose the ~~financial~~amount ~~statements~~of and ~~enhance~~reasons ~~the~~for ~~transparency~~transfers ~~and~~between ~~understandability~~Level of1 ~~hedge results. The amendments expand an entity’s ability to hedge nonfinancial~~ and ~~financial~~Level ~~risk~~2 ~~components~~of ~~and~~the ~~reduce complexity in~~ fair value ~~hedges~~hierarchy, ofbut ~~interest~~public ~~rate~~companies ~~risk.~~will ~~The~~be ~~guidance~~required ~~eliminates the requirement~~ to ~~separately~~disclose ~~measure~~the range and ~~report~~weighted ~~hedge~~average ~~ineffectiveness~~used ~~and~~to ~~generally~~develop ~~requires~~significant ~~the~~unobservable ~~entire~~inputs ~~change~~for inLevel ~~the~~3 fair value ~~of a hedging instrument to be presented in the same income statement line as the hedged item~~measurements. The guidance also ~~eases~~modifies certain ~~documentation~~disclosure ~~and assessment~~ requirements ~~and modifies the accounting~~ for ~~components~~nonpublic ~~excluded~~entities ~~from~~to ~~the~~make ~~assessment~~them ofless ~~hedge effectiveness~~burdensome. ~~ASU 2017-12~~It is effective for ~~annual~~all ~~and~~entities ~~interim~~for ~~periods~~fiscal years beginning after December 15, ~~2018~~2019, ~~with~~and ~~early~~interim ~~adoption~~periods ~~permitted~~within those years. ~~The~~Entities ~~amended~~are ~~presentation~~permitted ~~and~~to ~~disclosure~~early ~~guidance~~adopt isthe toentire bestandard ~~applied~~or ononly athe ~~prospective~~provisions ~~basis~~that eliminate or modify the requirements. The Company ~~does~~is ~~not~~currently ~~expect~~evaluating ~~the~~this ~~adoption~~guidance ofand ~~ASU~~the ~~2017-12~~impact it will have ~~a material impact~~ on its consolidated financial statements and disclosures.

In August 2018, the FASB issued ASU No. 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20)—Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”). The amendments in this update change the disclosure requirements for employers that sponsor defined benefit pension and/or other post-retirement benefit plans. It eliminates requirements for certain disclosures that are no longer considered cost beneficial and requires new disclosures that the FASB considers pertinent. The guidance is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-14 will have a material impact on its consolidated financial statements or disclosures.

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In ~~February~~August 2018, the FASB issued ASU No. 2018-0215, ~~Income~~Intangibles—Goodwill ~~Statement~~and Other—Internal-~~Reporting~~Use ~~Comprehensive~~Software ~~Income~~ (~~Topic~~Subtopic ~~220~~350-40): ~~Reclassification~~Customer’s ofAccounting ~~Certain~~for ~~Tax~~Implementation ~~Effects~~Costs ~~from~~Incurred ~~Accumulated~~in ~~Other~~a ~~Comprehensive~~Cloud ~~Income~~Computing Arrangement That Is a Service Contract (“ASU 2018-0215”),. ~~which~~The ~~permits~~amendments ~~entities~~in tothis ~~reclassify~~update ~~tax~~align ~~effects~~the ~~stranded~~requirements for capitalizing implementation costs incurred in ~~accumulated~~a ~~other~~cloud ~~comprehensive~~computing ~~income~~arrangement (~~loss~~i.e. hosting arrangement) asthat is a ~~result~~service ofcontract ~~tax~~with ~~reform~~the requirements for capitalizing implementation costs incurred to ~~retained~~develop ~~earnings~~or obtain internal-use software under Subtopic 350-40. ~~Companies~~The ~~that~~amendments ~~elect~~require certain costs incurred during the application development stage to ~~reclassify~~be ~~these~~capitalized ~~amounts~~and ~~must~~other ~~reclassify~~costs ~~stranded~~incurred ~~tax~~during ~~effects~~the ~~for~~preliminary ~~all~~project ~~items~~and ~~accounted~~post-implementation ~~for~~stages into ~~accumulated~~be ~~other~~expensed ~~comprehensive~~as ~~income~~they ~~(loss)~~are incurred. ~~ASU~~Capitalized ~~2018-02~~implementation costs related to a hosting arrangement that is ~~effective~~a service contract will be amortized over the term of the hosting arrangement including reasonably certain renewals, beginning when the module or component of the hosting arrangement is ready for ~~all~~its ~~entities~~intended use. Accounting for the hosting component of the arrangement is not affected. The guidance is effective for fiscal years beginning after December 15, ~~2018~~2019, ~~and~~including interim periods within ~~those~~that fiscal ~~years~~year. ~~with~~Early ~~early~~ adoption is permitted. The Company does not expect the adoption of ASU 2018-0215 will have a material impact on its consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). The amendments expand the scope of ASC 718, Compensation—Stock Compensation (“ASC 718”) to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of ASC 718 to nonemployee awards except for certain exemptions specified in the amendment. The guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that fiscal year. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-07 will have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-14, Compensation —Retirement Benefits —Defined Benefit Plans —General (Subtopic 715-20) —Disclosure Framework —Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”). The amendments in this update change the disclosure requirements for employers that sponsor defined benefit pension and/or other post retirement benefit plans. It eliminates requirements for certain disclosures that are no longer considered cost beneficial and requires new disclosures that the FASB considers pertinent. The guidance is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-14 will have a material impact on its consolidated financial statements or disclosures.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles —Goodwill and Other —Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). The amendments in this update align the requirements for capitalizing implementation costs incurred in a cloud computing arrangement (i.e. hosting arrangement) that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software under Subtopic 350-40. The amendments require certain costs incurred during the application development stage to be capitalized and other costs incurred during the preliminary project and post-implementation stages to be expensed as they are incurred. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement including reasonably certain renewals, beginning when the module or component of the hosting arrangement is ready for its intended use. Accounting for the hosting component of the arrangement is not affected. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-15 will have a material impact on its consolidated financial statements.

4. Debt

Current portion of debt at ~~October~~March 724, ~~2018~~2019 and December 3130, ~~2017~~2018 was as follows (in thousands):

	October 7, 2018			December 31, 2017
	March 24, 2019			December 30, 2018
Revolving Credit Facility	$	35,000		$	8130,000
Promissory Note	—			1,775
Less:
Debt issuance costs	(~~971~~804		)	(~~1,263~~905		)
Total current portion of debt	$	34,~~029~~196		$	8129,~~512~~095

Long-term debt at ~~October~~March 724, ~~2018~~2019 and December 3130, ~~2017~~2018 was as follows (in thousands):

	October 7, 2018			December 31, 2017
	March 24, 2019			December 30, 2018
Term Loan Facility	$	625,000		$	625,000
Less:
Debt issuance costs	(1,~~939~~748		)	(21,~~298~~869		)
Discount on debt issuance	(43,~~137~~708		)	(43,~~835~~927		)
Total long-term debt	$	~~618~~619,~~924~~544		$	~~617~~619,~~867~~204

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In conjunction with the Ares Acquisition, Smart & Final Stores LLC (“Smart & Final Stores”) entered into financing arrangements effective November 15, 2012, including the Term Loan Facility and an asset-based lending facility (the “Revolving Credit Facility”).

Term Loan Facility

The Term Loan Facility, as amended, provided financing of $625.0 million and has a maturity date of November 15, 2022. Debt issuance costs and debt discount are both amortized over the remaining term of the Term Loan Facility. As of March 24, 2019 and December 30, 2018, the weighted-average interest rate on the amount outstanding under the Term Loan Facility was 6.13% and 5.88%, respectively.

All obligations under the Term Loan Facility are secured by (1) a first-priority security interest in substantially all of the property and assets of, as well as the equity interests owned by, Smart & Final Stores and SF CC Intermediate Holdings, Inc., a direct wholly owned subsidiary of SFSI (“Intermediate Holdings”), and the other guarantors, with certain exceptions, and (2) a second-priority security interest in the Revolving Credit Facility collateral.

~~During~~Mandatory ~~the~~prepayments ~~third~~are ~~quarter~~required ~~of 2016, the Company amended the Term Loan Facility~~ (~~the “Fourth Amendment”~~i) in ~~to increase~~ the ~~size~~amount of the ~~Term~~net ~~Loan~~proceeds ~~Facility~~of bya ~~$30.1~~sale ~~million,~~of ~~from $594.9 million to $625.0 million~~assets, ~~and~~subject to ~~extend~~ the ~~original~~priority ~~November 15,~~of ~~2019~~the ~~maturity~~Revolving ~~date~~Credit toFacility ~~November 15~~collateral, ~~2022.~~and ~~Additionally,~~ (ii) in ~~connection with~~ the ~~Fourth~~amount ~~Amendment,~~of ~~the~~certain ~~Eurocurrency~~excess ~~Borrowings~~cash ~~applicable~~flows, ~~margin~~adjusted ~~increased~~by ~~from~~any ~~3.25%~~voluntary ~~to 3~~prepayments.~~50%.~~ AsThe ofTerm ~~October 7,~~Loan ~~2018~~Facility ~~and~~has ~~December 31,~~no ~~2017,~~financial ~~the~~covenant ~~weighted-average~~requirements. ~~interest~~The ~~rate~~Term onLoan ~~the~~Facility ~~amount~~contains ~~outstanding~~covenants ~~under~~that ~~the~~would ~~Term~~restrict ~~Loan~~our ~~Facility~~ability ~~was~~to ~~5.66%~~pay ~~and~~cash 5dividends.~~20%, respectively.~~

The Revolving Credit Facility originally provided financing of up to $150.0 million (including up to $50.0 million for the issuance of letters of credit) subject to a borrowing base, for a term of five years. The borrowing base is a formula based on certain eligible inventory and receivables, minus certain reserves.14

~~All~~Table ~~obligations under the Revolving Credit Facility are secured by (1) a first-priority security interest in the accounts receivable, inventory, cash and cash equivalents, and related assets~~ of Smart & Final Stores and Intermediate Holdings and the other guarantors under the facility, and (2) a second-priority security interest in substantially all of the other property and assets of, as well as the equity interests owned by, Smart & Final Stores and Intermediate Holdings and the other guarantors under the facility.Contents

~~During the third quarter of 2016, the Company amended the~~ Revolving Credit Facility (the “Second Amendment”) to increase the committed amount to $200.0 million. Additionally, the maturity date was extended from November 15, 2017 to the earlier of (a) July 19, 2021 and (b) to the extent the Term Loan Facility (and any refinancing of the Term Loan Facility) has not been paid in full, the date that is 60 days prior to the earliest scheduled maturity date of the Term Loan Facility (or such refinancing of the Term Loan Facility). In addition, the applicable margin ranges were reduced with respect to (i) alternate base rate loans to 0.25% to 0.50% from 0.25% to 0.75% and (ii) LIBOR rate loans to 1.25% to 1.50% from 1.25% to 1.75%.

AtThe ~~October 7,~~Revolving ~~2018~~Credit ~~and December 31~~Facility, ~~2017~~as amended, ~~the~~provides ~~alternate~~financing ~~base~~of ~~rate~~up ~~was~~to 5$200.~~00%~~0 million ~~and~~(including ~~4.50%,~~up ~~respectively~~to ~~and~~$50.0 million ~~the applicable margin~~ for ~~alternate~~the ~~base~~issuance ~~rate~~of ~~loans~~letters ~~was~~of ~~0.25%,~~credit) ~~for~~subject to a ~~total~~borrowing ~~rate~~base. ofThe ~~5.25%~~calculated ~~and~~borrowing ~~4.75%~~base, ~~respectively.~~a ~~The~~formula ~~calculated~~based ~~borrowing~~on ~~base~~certain ofeligible ~~the~~inventory ~~Revolving~~and ~~Credit~~receivables, ~~Facility~~minus certain reserves, was $~~201~~200.7 million and $~~206~~208.92 million at ~~October~~March 724, 2019 and December 30, 2018, respectively. As of March 24, 2019 and December 3130, ~~2017~~2018, the amount outstanding under the Revolving Credit Facility was $35.0 million and $30.0 million, respectively.

The ~~Revolving~~maturity ~~Credit~~date ~~Facility also provides for a $65.0 million sub-limit for letters~~ of ~~credit, of which~~ the ~~Company~~Revolving ~~had~~Credit ~~$47.1~~Facility ~~million~~is ~~and~~the ~~$36.2~~earlier ~~million outstanding as~~ of ~~October~~(a) 7July 19, ~~2018~~2021 and ~~December~~(b) ~~31,~~to ~~2017,~~the ~~respectively.~~extent Asthe ofTerm ~~October 7,~~Loan ~~2018~~Facility (and ~~December 31,~~any ~~2017,~~refinancing of the ~~amount~~Term ~~available~~Loan ~~for~~Facility) ~~borrowing~~has ~~under~~not ~~the~~been ~~Revolving~~paid ~~Credit~~in ~~Facility~~full, ~~was~~the ~~$117.9~~date ~~million~~that ~~and~~is ~~$82.8~~60 days ~~million,~~prior ~~respectively.~~to ~~The~~the ~~Revolving~~earliest ~~Credit~~scheduled ~~Facility~~maturity ~~does~~date ~~not~~of ~~include~~the ~~financial~~Term ~~covenant~~Loan ~~requirements~~Facility ~~unless~~(or asuch ~~defined~~refinancing ~~covenant~~of ~~trigger~~the ~~event~~Term ~~has~~Loan ~~occurred~~Facility). ~~and~~Debt isissuance ~~continuing.~~costs Asare ofamortized ~~October 7,~~over ~~2018~~the ~~and~~remaining ~~December 31,~~term ~~2017,~~of nothe ~~trigger~~Revolving ~~event~~Credit ~~had occurred~~Facility.

~~During~~Borrowings under the ~~third~~Revolving ~~quarter~~Credit ofFacility ~~2017~~bear interest at an applicable margin plus, ~~the~~at ~~Company~~Smart & ~~entered~~Final ~~into~~Stores’ option, a ~~Promissory~~fluctuating ~~Note~~rate equal to ~~purchase~~either ~~certain~~(1) adjusted ~~real~~LIBOR ~~property~~(LIBOR rate in effect for ~~$1.8~~the ~~million~~applicable ~~that~~interest isperiod, ~~financed~~adjusted byfor statutory reserves) or (2) the ~~seller~~alternate base rate. ~~During~~At ~~the~~March 24, ~~third~~2019 ~~quarter~~and ofDecember 30, 2018, the ~~Company~~alternate ~~repaid~~base rate was 5.50% and the ~~Promissory~~applicable ~~Note~~margin infor ~~full~~alternate base rate loans was 0.25%, for a total rate of 5.75%.

5.All ~~Fair~~obligations ~~Value~~under ~~Measurements~~the Revolving Credit Facility are secured by (1) a first-priority security interest in the accounts receivable, inventory, cash and cash equivalents, and related assets of Smart & Final Stores and Intermediate Holdings and the other guarantors under the facility, and (2) a second- priority security interest in substantially all of the other property and assets of, as well as the equity interests owned by, Smart & Final Stores and Intermediate Holdings and the other guarantors under the facility.

~~Fair~~The ~~value~~Revolving isCredit ~~defined~~Facility asalso ~~the~~provides ~~price~~for ~~that would be received to sell an asset or paid to transfer~~ a ~~liability in an orderly transaction between market participants at the measurement date~~$65.0 million Tosub-limit ~~estimate~~for ~~the~~letters ~~fair~~of ~~values~~credit, of ~~its~~which ~~financial and nonfinancial assets and liabilities,~~ the Company ~~uses~~had ~~valuation~~$45.0 million ~~approaches~~outstanding ~~within~~as ~~a hierarchy that maximizes the use~~ of ~~observable~~March 24, ~~inputs~~2019 and ~~minimizes~~December 30, ~~the~~2018. ~~use~~As of ~~unobservable~~March 24, ~~inputs~~2019 byand ~~requiring~~December 30, ~~that~~2018, ~~observable~~the ~~inputs~~amount ~~be used when~~ available. ~~Observable~~for ~~inputs~~borrowing ~~are~~under ~~inputs that market participants would use in pricing~~ the ~~asset~~Revolving orCredit ~~liability~~Facility ~~based~~was on$119.7 million ~~market~~and ~~data~~$125.0 million, ~~obtained from sources independent of the Company~~respectively. ~~Unobservable~~The ~~inputs~~Revolving ~~are~~Credit ~~inputs~~Facility ~~that~~does ~~reflect~~not ~~the~~include ~~Company’s~~financial ~~assumptions~~covenant ~~about~~requirements ~~the~~unless ~~inputs~~a ~~that~~defined ~~market~~covenant ~~participants~~trigger ~~would~~event ~~use~~has inoccurred ~~pricing the asset or liability~~ and ~~are~~is ~~developed based on the best information available in the circumstances~~continuing. ~~The~~As ~~fair~~of ~~value~~March 24, ~~hierarchy~~2019 isand ~~divided~~December 30, ~~into~~2018, ~~three~~no ~~levels~~trigger ~~based~~event onhad ~~the source of inputs as follows:~~occurred.

~~Level 1—Quoted~~5. ~~prices for identical instruments in active markets~~Leases

~~Level 2—Quoted~~The ~~prices~~Company ~~for~~leases ~~similar~~certain ~~instruments~~retail instores, ~~active~~warehouses, ~~markets;~~distribution ~~quoted~~centers, ~~prices~~office ~~for~~space, ~~identical~~land orand ~~similar~~equipment. ~~instruments~~These inleases ~~markets~~are ~~that~~recorded ~~are~~as ~~not~~right-of-use ~~active;~~assets and ~~model~~lease obligation liabilities for leases with terms greater than 12 months. Our leases generally have remaining terms of 1-~~derived~~15 ~~valuations~~years, inmost of which ~~all~~include ~~significant~~renewal ~~inputs~~options ~~and~~to ~~significant~~extend ~~value~~the ~~drivers~~leases ~~are~~for ~~observable~~additional in5-year ~~active~~periods ~~markets~~at the Company’s discretion. Generally, the lease term is the minimum of the noncancelable period of the lease or the lease term inclusive of reasonably certain renewal periods up to a term of 15 years.

Operating lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred. Tenant allowances used to fund leasehold improvements are recognized when earned and reduce our right-of-use asset related to the lease. These are amortized through the right-of-use asset as reductions of expense over the lease term.

Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, we estimate incremental secured borrowing rates corresponding to the maturities of the leases. We estimate this rate based on prevailing financial market conditions as rates are not implicitly stated in most leases. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. Leased assets are presented net of accumulated amortization.

Adoption of Topic 842 resulted in the recording net lease assets and lease liabilities of approximately $922.3 million and $972.0 million, respectively. The $49.7 million difference in the lease liabilities and net lease assets represents the net ASC 840 lease liabilities at year-end 2018 that were netted against the initial right-of-use-asset, which included: straight-line rent, lease intangibles assets, closed store reserves and deferred gains on sale-leaseback transactions. The $10.5 million transition adjustment to retained earnings was comprised of $6.6 million of build-to-suit financing lease assets that were derecognized and recorded as operating leases in transition, $6.7 million of initial impairment to right-of-use-assets, which were partially offset by the related deferred tax effect of $2.8 million.

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Supplemental balance sheet information related to leases was as follows:

	Classification	March 24, 2019

Assets
Operating lease assets	Operating lease assets	$	886,091
Finance lease assets	Buildings and improvements	21,043
Total lease assets		$	907,134

Liabilities
Current
Operating	Current portion of operating and financing lease liabilities	$	76,583
Finance	Current portion of operating and financing lease liabilities	903
Noncurrent
Operating	Long-term operating lease liabilities	867,606
Finance	Obligations under financing leases	22,229
Total lease liabilities		$	967,321

The components of lease cost were as follows:

	Twelve weeks ended
	March 24, 2019

Operating lease cost	$	32,648
Finance lease cost
Amortization of leased assets	325
Interest on lease liabilities	378
Sublease income	(895		)
Net lease cost	$	32,465

Lease term and discount rate were as follows:

Discount Rate	March 24, 2019

Weighted-average remaining lease term (in years)
Operating leases	12.7
Finance leases	15.0
Weighted-average discount rate
Operating leases	6.85	%
Finance leases	7.02	%

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Supplemental disclosures of cash flow information related to leases were as follows:

	Twelve weeks ended
	March 24, 2019

Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	34,713
Operating cash flows from finance leases	$	378
Financing cash flows from finance leases	$	210

Non-cash items
Leased assets obtained in exchange for new financing lease obligations	$	—
Leased assets obtained in exchange for new operating lease liabilities	$	2,716

Maturities of lease liabilities were as follows as of March 24, 2019:

	Operating		Finance
	Leases		Leases		Total

Within 1 year	$	133,110	$	2,377	$	135,487
2 years	135,757		2,377		138,134
3 years	125,895		2,377		128,272
4 years	116,227		2,460		118,687
5 years	107,010		2,501		109,511
Thereafter	853,526		26,204		879,730
Total lease payments	$	1,471,525	$	38,296	$	1,509,821
Less: Imputed interest	527,336		15,164		542,500
Present value of lease liabilities	$	944,189	$	23,132	$	967,321

6. Fair Value Measurements

The Company applies the provisions of ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), for its financial and nonfinancial assets and liabilities. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:

Level 1—Quoted prices for identical instruments in active markets

Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets

Level 3—Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable

The Company’s assets and liabilities measured at fair value on a recurring basis are summarized in the following table by the type of inputs applicable to the fair value measurements (in thousands):

Fair Value Measurement at October 7, 2018

Fair Value Measurement at March 24, 2019

Description

Total as of ~~October~~March 724, ~~2018~~2019

Quoted Prices in Active Markets for Identical Assets (Level 1)

Significant Other Observable Inputs (Level 2)

Significant Unobservable Inputs (Level 3)

Financial assets

Other assets—cash and cash equivalents that fund supplemental executive retirement plan and deferred compensation plan

~~546~~554

—

Other assets—assets that fund supplemental executive retirement plan

3,~~505~~546

—

Other assets—deferred compensation plan investment in Sprouts and other

65,~~027~~222

—

Financial liabilities

Other long-term liabilities—deferred compensation plan

(1918,~~951~~102

)

(21,~~553~~958

)

(1716,~~398~~144

)

—

Total

(98,~~873~~780

)

7,~~525~~364

(1716,~~398~~144

)

—

Level 1 Investments include money market funds of $0.5 million, market index funds of $3.5 million and an investment in Sprouts and other of $6.0 million with the corresponding deferred compensation liabilities of $2.6 million. The fair values of these investments are based on quoted market prices in an active market.17

Level 2 Liabilities include $17.4 million of deferred compensation liabilities, the fair value of which is based on quoted prices of similar assets traded in active markets.

	Fair Value Measurement at December 31, 2017
Description	Total as of December 31, 2017			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Financial assets
Other assets—cash and cash equivalents that fund supplemental executive retirement plan and deferred compensation plan	$	540		$	540		$	—		$	—
Other assets—assets that fund supplemental executive retirement plan	3,497			3,497			—			—
Other assets—deferred compensation plan investment in Sprouts	2,387			2,387			—			—
Derivatives	190			—			190			—
Financial liabilities
Other long-term liabilities—deferred compensation plan	(18,938		)	(2,268		)	(16,670		)	—
Total	$	(12,324	)	$	4,156		$	(16,480	)	$	—

Level 1 Investments include money market funds of $0.5 million, market index funds of $3.5 million and an investment in Sprouts of $2.4 million with the corresponding deferred compensation liabilities of $2.3 million. The fair values of these investments are based on quoted market prices in an active market.

Level 2 Liabilities include $16.7 million of deferred compensation liabilities, the fair value of which is based on quoted prices of similar assets traded in active markets, and $0.2 million of derivatives, which are interest rate hedges. The fair values of the derivatives are determined based primarily on a third-party pricing model that applies observable credit spreads to each exposure to calculate a credit risk adjustment and the inputs are changed only when corroborated by observable market data.

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~~Certain~~Level 1 ~~assets~~Investments ~~are~~include ~~measured~~money atmarket ~~fair~~funds ~~value~~of ~~on a nonrecurring basis~~$0.6 million, ~~which~~market ~~means~~index ~~the~~funds ~~assets~~of ~~are~~$3.5 ~~not~~million ~~measured~~and ~~at fair value on~~ an ~~ongoing~~investment ~~basis but, rather, are subject to fair value adjustments only~~ in ~~certain~~Sprouts ~~circumstances~~and ~~(for~~other ~~example, when there is evidence~~ of ~~impairment)~~$5. ~~See Note~~ 2, million ~~Summary~~with ofthe ~~Significant~~corresponding ~~Accounting~~deferred ~~Policies~~compensation —liabilities ~~Property,~~of ~~Plant and Equipment, Capitalized Software and Goodwill and Intangible Assets~~$2.0 million. The fair ~~value~~values ~~measurements~~of ~~were~~these ~~determined~~investments ~~using~~are ~~available~~based ~~market~~on ~~capitalization~~quoted ~~rates, estimated discounted cash flows and public company comparable~~ market ~~multiples~~prices ~~data~~in atan ~~the~~active ~~measurement dates~~market. ~~The Company classifies the measurements as Level 3.~~

6Level 2 Liabilities include $16.1 million ~~Retirement~~of ~~Benefit~~deferred ~~Plans~~compensation ~~and~~liabilities, ~~Postretirement~~the ~~and~~fair ~~Postemployment~~value ~~Benefit~~of ~~Obligations~~which is based on quoted prices of similar assets traded in active markets.

	Fair Value Measurement at December 30, 2018
Description	Total as of December 30, 2018			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Financial assets
Other assets—cash and cash equivalents that fund supplemental executive retirement plan and deferred compensation plan	$	548		$	548		$	—		$	—
Other assets—assets that fund supplemental executive retirement plan	3,450			3,450			—			—
Other assets—deferred compensation plan investment in Sprouts and other	5,530			5,530			—			—
Financial liabilities
Other long-term liabilities—deferred compensation plan	(16,896		)	(1,974		)	(14,922		)	—
Total	$	(7,368	)	$	7,554		$	(14,922	)	$	—

Level 1 Investments include money market funds of $0.5 million, market index funds of $3.5 million and an investment in Sprouts and other of $5.5 million with the corresponding deferred compensation liabilities of $2.0 million. The fair values of these investments are based on quoted market prices in an active market.

Level 2 Liabilities include $14.9 million of deferred compensation liabilities, the fair value of which is based on quoted prices of similar assets traded in active markets.

Certain assets are measured at fair value on a nonrecurring basis, which means the assets are not measured at fair value on an ongoing basis but, rather, are subject to fair value adjustments only in certain circumstances (for example, when there is evidence of impairment). See Note 2, Significant Accounting Policies — Property, Plant and Equipment, Capitalized Software and Goodwill and Intangible Assets. The fair value measurements were determined using available market capitalization rates, estimated discounted cash flows and public company comparable market multiples data at the measurement dates. The Company classifies the measurements as Level 3.

7. Retirement Benefit Plans and Postretirement and Postemployment Benefit Obligations

Defined Benefit Retirement Plan

The Company has a funded noncontributory qualified defined benefit retirement plan (the “Single-Employer Plan”) that, prior to June 1, 2008, covered substantially all full-time employees following a vesting period of five years of service (the “Pension Participants”) and provided defined benefits based on years of service and final average salary. The Predecessor froze the accruing of future benefits for the majority of the Pension Participants (the “Frozen Pension Participants”) effective June 1, 2008. As of ~~October~~March 724, ~~2018~~2019, there were approximately ~~450~~469 hourly paid employees in the Company’s distribution and transportation operations accruing future benefits under the plan and who remain eligible for pension benefits under the prior terms. No new employees are eligible for participation in the Single-Employer Plan after June 1, 2008, with the exception of new hires in the Company’s distribution and transportation operations. After June 1, 2008 Frozen Pension Participants continued to accrue service for vesting purposes only and future payments from the Single-Employer Plan will be in accordance with the Single-Employer Plan’s retirement payment provisions. The Company funds the Single-Employer Plan with annual contributions as required by the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). The Company uses a measurement date of December 31 for the Single-Employer Plan.

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The components included in the net periodic benefit cost for the periods indicated are as follows (in thousands):

Sixteen Weeks Ended

Forty Weeks Ended

Twelve Weeks Ended

October 7,

October 8,

October 7,

October 8,

March 24,

March 25,

2018

2017

2018

2017

2019

2018

Service cost

~~700~~373

~~604~~402

~~1,564~~

~~1,397~~

Interest cost

32,~~135~~191

21,~~958~~798

~~7,000~~

~~6,837~~

Expected return on plan assets

(32,~~735~~016

)

(32,~~117~~142

)

~~(8,341~~

)

~~(7,204~~

)

Amortization of net actuarial loss

6766

~~191~~38

~~149~~

~~441~~

Net periodic benefit cost

~~167~~614

~~636~~96

~~372~~

~~1,471~~

During the ~~forty~~twelve weeks ended ~~October~~March 724, ~~2018~~2019, the Company ~~made~~did anot ~~$8.9~~make ~~million~~a incontribution ~~contributions~~ to the Single-Employer Plan. The Company’s expects to fund a minimum required total contribution ~~was~~of approximately $83.84 million during fiscal year ~~2018~~2019. ~~The Company does not expect to make any additional contributions in fiscal year 2018.~~

Supplemental Executive Retirement Plan

The Company maintains a noncontributory, nonqualified defined benefit supplemental executive retirement plan (the “SERP”), which provides supplemental income payments for certain current and former corporate officers in retirement. No new participants are eligible for participation and service and compensation accruals were frozen effective June 1, 2008. Accordingly, the retirement benefit for SERP participants who remained employed by the Company was frozen, and future service or compensation increases will not adjust the SERP benefit amount.

To provide partial funding for the SERP, the Company invests in corporate-owned life insurance policies. The Company uses a measurement date of December 31 for the SERP.

The components included in the net periodic benefit cost for the periods indicated are as follows (in thousands):

	Sixteen Weeks Ended				Forty Weeks Ended
	Twelve Weeks Ended
	October 7,		October 8,		October 7,		October 8,
	March 24,		March 25,
	2018		2017		2018		2017
	2019		2018
Interest cost	$	~~308~~254	$	~~336~~231	$	~~771~~	$	~~839~~
Net periodic benefit cost	$	~~308~~254	$	~~336~~231	$	~~771~~	$	~~839~~

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Postretirement and Postemployment Benefit Obligations

The Company provides health care benefits for certain retired employees. Prior to June 1, 2008, substantially all full-time employees could become eligible for such benefits if they reached retirement age while still working for the Company. The Company froze the accruing of benefits for eligible participants effective June 1, 2008. Participants who were eligible for a retiree medical benefit and retired prior to June 1, 2009 continued to be eligible for retiree medical coverage. The Company retains the right to make further amendments to the benefit formula and eligibility requirements. This postretirement health care plan is contributory with participants’ contributions adjusted annually. The plan limits benefits to the lesser of the actual cost for the medical coverage selected or a defined dollar benefit based on years of service, applicable to eligible retirees. The Company uses a measurement date of December 31 for this health care plan.

~~The components included in the postretirement benefit cost for the periods indicated are as follows (in thousands):~~19

	Sixteen Weeks Ended				Forty Weeks Ended
	October 7,		October 8,		October 7,		October 8,
	2018		2017		2018		2017
Service cost	$	154	$	154	$	385	$	385
Interest cost	185		185		462		462
Net periodic benefit cost	$	339	$	339	$	847	$	847

7. Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law. The Tax Act includes a number of provisions, including (1) the lowering of the U.S. corporate tax rate from 35% to 21%; (2) elimination of the corporate alternative minimum tax (AMT); (3) the creation of the base erosion anti-abuse tax (BEAT, a new minimum tax), a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (4) a new provision designed to tax global intangible low-taxed income (GILTI), which allows for the possibility of using foreign tax credits (FTCs) and a deduction of up to 50 percent to offset the income tax liability (subject to some limitations); (5) a new limitation on deductible interest expense; (6) the repeal of the domestic production activity deduction; and (7) limitations on the deductibility of certain executive compensation.

The Company’s effective tax rate for the forty weeks ended October 7, 2018 and October 8, 2017 was 3.1% and 5.2%, respectively. The Company recorded income tax expense of $305,000 for the forty weeks ended October 7, 2018 on income before income taxes of $10.0 million. Income tax expense for the forty weeks ended October 7, 2018 was different than the U.S. federal statutory income tax rate of 21% primarily due to favorable “return-to-provision” adjustments and certain tax credits, partially offset by the unfavorable impact of the new executive compensation limitations, state income tax expense, stock option award exercises and vesting of restricted stock awards. The Company recorded income tax expense of $419,000 for the forty weeks ended October 8, 2017 on income before income taxes of $8.1 million. The income tax expense for the forty weeks ended October 8, 2017 was different than the U.S. federal statutory income tax rate of 35% primarily due to favorable excess tax benefits from stock option award exercises and restricted stock vesting, partially offset by the unfavorable impact of executive compensation limitations and state income tax expense.

On the enactment date of the Tax Act, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. As of December 31, 2017, the Company was able to reasonably estimate certain Tax Act effects and, therefore, recorded provisional adjustments associated with the deemed repatriation transition tax and remeasurement of certain deferred tax assets and liabilities. As of October 7, 2018, the Company finalized the accounting for the federal transition tax liability and recorded a measurement period adjustment for the change from our provisional estimate, which resulted in a tax benefit of $153,000. The Company’s accounting for the Tax Act is incomplete for the remeasurement of deferred taxes and the previously disclosed provisional amount continues to be provisional and will be adjusted, if necessary, based on our ongoing analysis of the Tax Act and new regulatory guidance or other interpretations of the Tax Act. The accounting for this item must be completed within the measurement period defined by SAB 118, not longer than one year from the period in which the Tax Act was enacted.

The Company files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and Mexico. The Company’s federal tax return for the 2016 fiscal year was under examination by the Internal Revenue Service (“IRS”) but this examination has been subsequently closed by the IRS. The Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2013. The tax years which remain subject to examination or are being examined by major tax jurisdictions as of October 7, 2018 include fiscal years 2013 through 2016 for state purposes and 2014, 2015, 2016 and 2017 for federal purposes.

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8.The ~~Share-Based~~components ~~Compensation~~included in the postretirement benefit cost for the periods indicated are as follows (in thousands):

	Twelve Weeks Ended
	March 24,			March 25,
	2019			2018
Service cost	$	92		$	115
Interest cost	162			138
Amortization of net actuarial loss	(23		)	—
Net periodic benefit cost	$	231		$	253

8. Income Taxes

The Company’s effective tax rate for the twelve weeks ended March 24, 2019 and March 25, 2018 was 24.5% and 27.9%, respectively. In the first quarter of 2019, the income tax expense was different than the U.S. federal statutory income tax rate of 21% primarily due to state income tax expense, changes to valuation allowance on state deferred tax assets, changes to the cash surrender value of corporate-owned life insurance policies and tax credits. In the first quarter of 2018, the income tax expense was different than the U.S. federal statutory income tax rate of 21% primarily due to executive compensation limitations and state income tax expense.

The Company files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and Mexico. The tax years which remain subject to examination by major tax jurisdictions as of March 24, 2019 include fiscal years 2014 through 2018 for state purposes and 2015 through 2018 for federal purposes.

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”), which permits entities to reclassify tax effects stranded in accumulated other comprehensive income as a result of tax reform to retained earnings. Companies that elect to reclassify these amounts must reclassify stranded tax effects for all items accounted for in accumulated other comprehensive income. This guidance requires qualitative disclosure of the accounting policy for releasing income tax effects from accumulated other comprehensive income and if the reclassification election is made, the impacts of the change on the consolidated financial statements. The Company adopted ASU 2018-02 in the first quarter of 2019, did not reclassify the tax effects stranded in accumulated other comprehensive income, and there was no impact on the Company’s consolidated results of operations or cash flows. The Company’s policy for releasing disproportionate income tax effects from AOCI utilizes the portfolio approach.

9. Share-Based Compensation

2014 Incentive Plan

Effective September 23, 2014, and in connection with the IPO, SFSI adopted the Smart & Final Stores, Inc. 2014 Stock Incentive Plan (the “2014 Incentive Plan”). Effective March 13, 2017, the 2014 Incentive Plan was amended and restated to increase the number of shares that may be issued thereunder. The 2014 Incentive Plan provides for the issuance of equity-based incentive awards not to exceed 9,200,000 shares of Common Stock to eligible employees, consultants and non-employee directors in the form of stock options, restricted stock, other stock-based awards and performance-based cash awards. In addition, a number of shares of Common Stock equal to the number of shares of Common Stock underlying stock options that were previously issued under the 2012 Incentive Plan (as defined below) and that expire, terminate or are cancelled for any reason without being exercised in full will be available for issuance under the 2014 Incentive Plan.

On May 7, 2018, May 14, 2018 and July 30, 2018, the compensation committee of SFSI’s board of directors (the “Compensation Committee”) granted a total of 1,370,576 shares of restricted stock to certain management employees and non-employee directors under the 2014 Incentive Plan. These awards have time-based vesting terms subject to continuous employment with the Company. Except for the shares granted to non-employee directors, which vest in full one year from May 14, 2018, these awards vest in equal tranches of one-third each year over a three-year period on dates established by the Compensation Committee. During the ~~forty~~twelve weeks ended ~~October~~March 724, ~~2018~~2019, ~~112~~6,~~880~~929 shares of restricted stock were surrendered to the Company to cover the grantee’s income tax obligations in connection with the vesting of restricted stock awards.

~~The following table summarizes the restricted stock award activity under the 2014 Incentive Plan for the forty weeks ended October 7, 2018:~~20

	Shares		Weighted-Average Grant Date Fair Value
Outstanding at December 31, 2017	1,954,604		$	11.38
Granted	1,370,576		4.97
Forfeited	(25,334	)	9.59
Vested	(543,988	)	13.04
Outstanding at October 7, 2018	2,755,858		$	7.88

The Company recorded share-based compensation expense related to the restricted stock awards of $2.9 million and $2.6 million for the sixteen weeks ended October 7, 2018 and October 8, 2017, respectively, and $7.8 million and $5.0 million for the forty weeks ended October 7, 2018 and October 8, 2017, respectively. As of October 7, 2018, the unrecognized compensation cost was $12.4 million and related weighted-average period over which restricted stock award expense was expected to be recognized was approximately 1.73 years.

On July 30, 2018, the Committee granted stock options to purchase up to a total of 12,593 shares of Common Stock to a certain management employee under the 2014 Incentive Plan. These awards vest in equal installments of 25% each year over a four-year period from dates established by the Committee subject to continuous employment with the Company.

The following table summarizes the time-based option activity under the 2014 Incentive Plan for the forty weeks ended October 7, 2018 (dollars in thousands except weighted average exercise price):

	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at December 31, 2017	3,254,544		$	12.89	7.67 years	$	—
Granted	12,593		5.95
Forfeited	(54,652	)	12.54
Exercised	—		—
Expired	(14,656	)	13.26
Outstanding at October 7, 2018	3,197,829		$	12.86	6.92 years	$	—
Exercisable at October 7, 2018	1,945,169		$	12.65	6.47 years	$	—

Aggregate intrinsic value represents the difference between the closing stock price of the Common Stock and the exercise price of outstanding, in-the-money options. The Company’s ticker symbol on the New York Stock Exchange is SFS.

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The ~~Company~~following ~~recorded~~table ~~share-based~~summarizes ~~compensation~~the ~~expense~~restricted ~~for~~stock ~~time-based~~award ~~options~~activity ~~granted~~ under the 2014 Incentive Plan ~~of $0.7 million and $1.3 million~~ for the ~~sixteen~~twelve weeks ended ~~October~~March 724, 2018 and October 8, 2017, respectively, and $2.3 million and $2.8 million for the forty weeks ended October 7, 2018 and October 8, 2017, respectively. As of October 7, 2018, the unrecognized compensation cost was $2.2 million and related weighted-average period over which time-based option expense was expected to be recognized was approximately 1.38 years.2019:

	Shares		Weighted-Average Grant Date Fair Value
Outstanding at December 30, 2018	2,670,368		$	7.84
Granted	—		—
Forfeited	—		—
Vested	(31,712	)	11.36
Outstanding at March 24, 2019	2,638,656		$	7.80

The Company recorded share-based compensation expense related to the restricted stock awards of $2.2 million and $2.4 million for the twelve weeks ended March 24, 2019 and March 25, 2018, respectively. As of March 24, 2019, the unrecognized compensation cost was $7.9 million and related weighted-average period over which restricted stock award expense was expected to be recognized was approximately 1.50 years.

The following table summarizes the time-based option activity under the 2014 Incentive Plan for the twelve weeks ended March 24, 2019 (dollars in thousands except weighted average exercise price):

	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at December 30, 2018	3,103,845		$	12.87	6.69 years	$	—
Granted	—		—
Forfeited	—		—
Exercised	—		—
Expired	(15,860	)	14.28
Outstanding at March 24, 2019	3,087,985		$	12.87	6.46 years	$	—
Exercisable at March 24, 2019	1,918,012		$	12.66	6.01 years	$	—

Aggregate intrinsic value represents the difference between the closing stock price of the Common Stock and the exercise price of outstanding, in-the-money options. The closing stock price as reported on the New York Stock Exchange as of March 22, 2019 (the last trading day of the first quarter of 2019) was $5.15.

The Company recorded share-based compensation expense for time-based options granted under the 2014 Incentive Plan of $0.5 million and $0.7 million for the twelve weeks ended March 24, 2019 and March 25, 2018, respectively. As of March 24, 2019, the unrecognized compensation cost was $1.1 million and related weighted-average period over which time-based option expense was expected to be recognized was approximately 1.22 years.

2012 Incentive Plan

Effective November 15, 2012, SFSI adopted the SF CC Holdings, Inc. 2012 Stock Incentive Plan (the “2012 Incentive Plan”), which provides for the issuance of equity-based incentive awards not to exceed 11,400,000 shares of Common Stock. Effective upon closing of the IPO, no new awards may be granted under the 2012 Incentive Plan.

The following table summarizes the time-based option activity under the 2012 Incentive Plan for the ~~forty~~twelve weeks ended ~~October~~March 724, ~~2018~~2019 (dollars in thousands except weighted average exercise price):

	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at December 31, 2017	4,482,570		$	6.58	5.10 years	$	8,809
Outstanding at December 30, 2018	4,275,812		$	6.62	4.10 years	$	—
Forfeited	—		—
Exercised	(~~110~~5,~~922~~130	)	5.27
Cancelled	—		—
Expired	~~(67,260~~—	)	~~6.59~~—
Outstanding at October 7, 2018	4,304,388		$	6.62	4.33 years	$	—
Outstanding at March 24, 2019	4,270,682		$	6.62	3.87 years	$	—
Exercisable at October 7, 2018	4,304,388		$	6.62	4.33 years	$	—
Exercisable at March 24, 2019	4,270,682		$	6.62	3.87 years	$	—

The Company recorded share-based compensation expense for time-based options granted under the 2012 Incentive Plan of $0 and $0.3 million for the sixteen weeks ended October 7, 2018 and October 8, 2017, respectively, and $0.1 million and $0.6 million for the forty weeks ended October 7, 2018 and October 8, 2017, respectively. As of October 7, 2018, there was no unrecognized compensation cost.21

In connection with the Ares Acquisition on November 15, 2012, certain stock options to purchase shares of common stock of the Predecessor were converted into 3,625,580 stock options to purchase Common Stock (the “Rollover Options”). In the event of a participant’s termination of employment for cause or upon discovery that the participant engaged in detrimental activity, if the Company elected to exercise its repurchase right, it was required to do so within a 180-day period commencing on the later of (i) the date of termination and (ii) the date on which such Rollover Option was exercised. In the event of a participant’s termination of employment for any other reason, the repurchase right was required to be exercised by the Company during the 90-day period following the date of termination.

The following table summarizes the Rollover Option activity for the forty weeks ended October 7, 2018 (dollars in thousands except weighted average exercise price):

	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at December 31, 2017	1,127,920		$	2.50	0.99 years
Forfeited	—		—
Exercised	(524,466	)	2.48
Cancelled	—		—
Expired	—		—
Outstanding at October 7, 2018	603,454		$	2.51	0.25 years	$	—
Exercisable at October 7, 2018	603,454		$	2.51	0.25 years	$	—

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9As of March 24, 2019, there was no unrecognized compensation cost and share-based compensation expense recorded for the options granted under the 2012 Incentive Plan. ~~Accumulated~~The ~~Other~~Company ~~Comprehensive~~recorded ~~Loss~~share-based compensation expense for time-based options granted under the 2012 Incentive Plan of $0.1 million for the twelve weeks ended March 25, 2018.

~~The~~In ~~following~~June 2018, ~~table~~the ~~represents~~FASB ~~the~~issued ~~changes~~ASU inNo. 2018-07, Improvements ~~AOCL~~to byNonemployee ~~each~~Share-Based ~~component~~Payment ~~for~~Accounting (“ASU 2018-07”). The amendments expand the ~~forty~~scope ~~weeks~~of ~~ended~~ASC ~~October 7~~718, ~~2018~~Compensation—Stock Compensation (in“ASC ~~thousands~~718”): to include share-based payment transactions for acquiring goods and services from nonemployees. The Company adopted ASU 2018-07 in the first quarter of 2019 using the modified retrospective approach. The adoption of ASU 2018-07 did not have a material impact on the condensed consolidated financial statements.

	Defined Benefit Retirement Plan			Cash Flow Hedging Activity			Foreign Currency Translation and Employee Benefit Obligation Adjustment			Total
Balance at December 31, 2017	$	(22,776	)	$	101		$	(2,291	)	$	(24,966	)
OCI before reclassification	—			(138		)	(420		)	(558		)
Amounts reclassified out of AOCL	—			15			—			15
Net current period OCI	—			(123		)	(420		)	(543		)
Balance at October 7, 2018	$	(22,776	)	$	(22	)	$	(2,711	)	$	(25,509	)

10. Accumulated Other Comprehensive Loss

The following table represents the ~~items~~changes ~~reclassified~~in ~~out~~AOCL ofby each component ~~of AOCL and the related tax effects~~ for the ~~forty~~twelve weeks ended ~~October~~March 724, ~~2018~~2019, ~~(in~~net ~~thousands)~~of tax:

Details about AOCL Components	Amount Reclassified from AOCL			Location within Statement of Operations and Comprehensive Income
(in thousands)	Defined Benefit Retirement Plan			Cash Flow Hedging Activity			Foreign Currency Translation and Employee Benefit Obligation Adjustment			Total
Income on cash flow hedges
Balance at December 30, 2018	$	(20,337	)	$	(22	)	$	(2,431	)	$	(22,790	)
Interest rate swaps	$	21		Interest income (expense)
OCI before reclassification	—			—			(61		)	(61		)
	21			Total before income taxes
Amounts reclassified out of AOCL	—			—			—			—
	(6		)	Income tax (provision) benefit
Net current period OCI	—			—			(61		)	(61		)
	$	15		Reclassification of adjustments, net of tax
Balance at March 24, 2019	$	(20,337	)	$	(22	)	$	(2,492	)	$	(22,851	)
Total reclassifications for the forty weeks ended October 7, 2018	$	15		Total reclassifications, net of tax

~~10. Segment Information~~22

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11. Segment Information

The Company is a value-oriented retailer serving a diverse demographic of household and business customers through two complementary store banners. The “Smart & Final” business focuses on both household and business customers, and the “Smart Foodservice” business focuses primarily on restaurants, caterers and a wide range of other foodservice businesses. The Company’s chief operating decision maker (“CODM”) regularly reviews the operating performance of each of the store banners including measures of performance based on income (loss) from operations. The Company considers each of the store banners to be an operating segment and has further concluded that presenting disaggregated information of these two operating segments provides meaningful information as certain economic characteristics are dissimilar as well as the characteristics of the customer base served.

The “Corporate/Other” category is comprised primarily of corporate overhead support expenses and administrative expenses incidental to the activities of the reportable segments, interest expense and other costs associated with the Company’s debt obligations, equity earnings in its joint venture, and income taxes.

For the ~~sixteen~~twelve weeks ended ~~October~~March 724, ~~2018~~2019, the operating information and total assets for the reportable segments are as follows (in thousands):

	Smart & Final		Smart Foodservice		Corporate / Other			Consolidated
Net sales	$	1815,~~144,090~~909	$	~~353~~228,~~579~~893	$	—		$	1,~~497~~044,~~669~~802
Cost of sales, distribution and store occupancy	~~961~~691,~~575~~406		~~300~~194,~~999~~937		2,~~646~~123			1888,~~265,220~~466
Operating and administrative expenses	~~159~~116,~~742~~313		2519,~~660~~261		2419,~~488~~464			~~209~~155,~~890~~038
Income (loss) from operations	$	228,~~773~~190	$	2614,~~920~~695	$	(2721,~~134~~587	)	$	221,~~559~~298
As of October 7, 2018:
As of March 24, 2019:
Total assets	$	12,~~695~~268,~~259~~864	$	~~458~~554,~~194~~452	$	(324,~~894~~637	)	$	12,~~828~~498,~~559~~679
Intercompany receivable (payable)	$	~~289~~275,~~544~~151	$	7681,~~258~~394	$	(~~365~~356,~~802~~545	)	$	—
Investment in joint venture	$	—	$	—	$	1617,~~746~~705		$	1617,~~746~~705
Goodwill	$	~~181~~87,338	$	204,580	$	—		$	~~385~~291,918
For the sixteen weeks ended October 7, 2018:
For the twelve weeks ended March 24, 2019:
Capital expenditures	$	2715,~~747~~315	$	65,~~759~~150	$	75,~~806~~642		$	4226,~~312~~107
Depreciation and amortization	$	2518,~~899~~852	$	1,~~682~~486	$	23,~~248~~074		$	2923,~~829~~412

21For the twelve weeks ended March 25, 2018, the operating information for the reportable segments is as follows (in thousands):

	Smart & Final		Smart Foodservice		Corporate / Other			Consolidated
Net sales	$	795,192	$	221,045	$	—		$	1,016,237
Cost of sales, distribution and store occupancy	678,615		189,471		1,889			869,975
Operating and administrative expenses	109,569		17,796		20,065			147,430
Income (loss) from operations	$	7,008	$	13,778	$	(21,954	)	$	(1,168	)
As of March 25, 2018:
Total assets	$	1,702,671	$	406,831	$	(327,427	)	$	1,782,075
Intercompany receivable (payable)	$	322,587	$	48,413	$	(371,000	)	$	—
Investment in joint venture	$	—	$	—	$	15,796		$	15,796
Goodwill	$	181,338	$	204,580	$	—		$	385,918
For the twelve weeks ended March 25, 2018:
Capital expenditures	$	23,859	$	1,270	$	3,872		$	29,001
Depreciation and amortization	$	20,498	$	1,254	$	1,540		$	23,292

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~~For~~12. ~~the~~Commitments ~~sixteen weeks ended October 8, 2017, the operating information~~ and ~~total assets for the reportable segments are as follows (in thousands):~~Contingencies

	Smart & Final		Smart Foodservice		Corporate / Other			Consolidated
Net sales	$	1,115,234	$	342,119	$	—		$	1,457,353
Cost of sales, distribution and store occupancy	948,476		292,502		2,512			1,243,490
Operating and administrative expenses	145,410		23,972		25,903			195,285
Income (loss) from operations	$	21,348	$	25,645	$	(28,415	)	$	18,578
For the sixteen weeks ended October 8, 2017:
Capital expenditures	$	38,699	$	5,201	$	4,201		$	48,101
Depreciation and amortization	$	26,962	$	1,698	$	2,391		$	31,051

For the forty weeks ended October 7, 2018, the operating information for the reportable segments is as follows (in thousands):

	Smart & Final		Smart Foodservice		Corporate / Other			Consolidated
Net sales	$	2,807,739	$	831,651	$	—		$	3,639,390
Cost of sales, distribution and store occupancy	2,374,313		710,016		6,633			3,090,962
Operating and administrative expenses	385,179		62,329		60,384			507,892
Income (loss) from operations	$	48,247	$	59,306	$	(67,017	)	$	40,536
For the forty weeks ended October 7, 2018:
Capital expenditures	$	76,783	$	14,990	$	15,964		$	107,737
Depreciation and amortization	$	66,403	$	4,480	$	5,363		$	76,246

For the forty weeks ended October 8, 2017, the operating information for the reportable segments is as follows (in thousands):

	Smart & Final		Smart Foodservice		Corporate / Other			Consolidated
Net sales	$	2,716,337	$	786,320	$	—		$	3,502,657
Cost of sales, distribution and store occupancy	2,311,878		675,007		6,528			2,993,413
Operating and administrative expenses	357,112		57,579		59,330			474,021
Income (loss) from operations	$	47,347	$	53,734	$	(65,858	)	$	35,223
For the forty weeks ended October 8, 2017:
Capital expenditures	$	93,503	$	11,575	$	12,505		$	117,583
Depreciation and amortization	$	64,982	$	3,975	$	6,091		$	75,048

11. Commitments and Contingencies

Legal Actions

The Company is engaged in various legal actions, claims and proceedings in the ordinary course of business, including claims related to employment ~~related~~ matters, breach of contracts, products liabilities and intellectual property matters resulting from its business activities. The Company does not believe that the ultimate resolution of these pending claims will have a material adverse effect on its business, financial condition, results of operations and cash flows. However, litigation is subject to many uncertainties, and the outcome of certain individual litigated matters may not be reasonably predictable and any related damages may not be estimable. Some litigation matters could result in an adverse outcome to the Company, and any such adverse outcome could have a material adverse effect on its business, financial condition, results of operations and cash flows.

1213. ~~Earnings~~Loss Per Share

Basic ~~earnings~~loss per share represents net ~~income~~loss for the period shares of Common Stock were outstanding, divided by the weighted average number of shares of Common Stock outstanding for the applicable period. Diluted ~~earnings~~loss per share ~~represents~~is ~~net~~calculated ~~income~~by ~~divided~~dividing net loss by the weighted average number of shares of Common Stock outstanding for the applicable period~~, inclusive of the effect of dilutive securities such as outstanding stock options and unvested restricted stock~~.

22A reconciliation of the numerators and denominators of the basic and diluted loss per share calculations is as follows (in thousands, except per share amounts):

	Twelve Weeks Ended
	March 24,			March 25,
	2019			2018

Net loss	$	(6,677	)	$	(7,094	)

Weighted average shares outstanding for basic EPS	73,867,084			72,231,171
Effect of dilutive securities:
Assumed exercise of time-based stock options and vesting of restricted stock	—			—
Weighted average shares and share equivalents outstanding for diluted EPS	73,867,084			72,231,171

Basic loss per share	$	(0.09	)	$	(0.10	)
Diluted loss per share	$	(0.09	)	$	(0.10	)

Potentially dilutive securities representing 5,304,930 shares of Common Stock for the twelve weeks ended March 24, 2019 and 6,266,238 shares of Common Stock for the twelve weeks ended March 25, 2018 were excluded from the computation of diluted earnings per share because their effect would have been antidilutive.

14. Subsequent Events

On April 16, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with First Street Parent, Inc., a Delaware corporation (“Parent”), and First Street Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Parent (“Purchaser”). Parent and Purchaser are controlled by certain equity funds managed by Apollo Management IX, L.P., a Delaware limited partnership and an affiliate of Apollo Global Management, LLC.

Pursuant to the Merger Agreement, upon the terms and subject to the conditions thereof, Purchaser will commence a cash tender offer no later than May 7, 2019 (unless otherwise agreed to by Parent and the Company) to acquire all of the outstanding shares of Common Stock, at a price per share of Common Stock of $6.50 net to the holders thereof, payable in cash, without interest and less any applicable tax withholding (such offer, as it may be amended from time to time in accordance with the Merger Agreement, the “Offer,” and such amount of consideration or any greater amount per share that may be paid pursuant to the Offer, the “Offer Price”). Parent intends to fund the Offer Price with a combination of committed debt and equity financing. The transaction is not subject to a financing condition.

The obligation of Purchaser to purchase shares of Common Stock tendered in the Offer is subject to the satisfaction or waiver of a number of conditions set forth in the Merger Agreement, including but not limited to: (i) prior to the expiration of the Offer, there shall have been validly tendered and not validly withdrawn shares of Common Stock that, together with all other shares of Common Stock, if any, owned by Purchaser and its affiliates (as defined in Section 251(h) of the Delaware General Corporation Law), represent at least one share of Common Stock more than 50% of the total number of outstanding shares of Common Stock at the time of the expiration of the Offer, (ii) the expiration or termination of the waiting period applicable to the Offer or the Merger (as defined below) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and approval by the Mexican Federal Economic Competition Commission or the Mexican Federal Institute

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Aof ~~reconciliation~~Telecommunications shall have been obtained or deemed to have been obtained pursuant to Article 90(V) of the ~~numerators~~Mexican ~~and~~Federal ~~denominators~~Economic ofCompetition Law (collectively, the ~~basic~~“Regulatory ~~and~~Conditions”), ~~diluted~~(iii) the ~~earnings~~completion ~~per~~of ~~share~~a ~~calculations~~specified ismarketing asperiod ~~follows~~for (the debt financing in ~~thousands,~~accordance ~~except~~with ~~per~~the ~~share~~Merger ~~amounts~~Agreement, and (iv): each of the other conditions set forth in Annex I to the Merger Agreement.

	Sixteen Weeks Ended				Forty Weeks Ended
	October 7,		October 8		October 7,		October 8,
	2018		2017		2018		2017
Net income	$	10,160	$	5,106	$	9,667	$	7,642
Weighted average shares outstanding for basic EPS	73,117,389		72,446,404		72,713,906		72,437,033
Effect of dilutive securities:
Assumed exercise of time-based stock options and vesting of restricted stock	1,329,271		1,806,970		1,357,798		3,151,149
Weighted average shares and share equivalents outstanding for diluted EPS	74,446,660		74,253,374		74,071,704		75,588,182
Basic earnings per share	$	0.14	$	0.07	$	0.13	$	0.11
Diluted earnings per share	$	0.14	$	0.07	$	0.13	$	0.10

The Offer will initially expire at one minute after 11:59 p.m. (Eastern Time) on the date that is 20 business days following the commencement of the Offer (unless otherwise agreed to by Parent and the Company). Under certain circumstances, Purchaser may be required or permitted to extend the Offer on one or more occasions in accordance with the terms set forth in the Merger Agreement and the applicable rules and regulations of the SEC. In general, Purchaser will not be required to extend the Offer beyond August 16, 2019 (the “End Date”), and only in the event the Regulatory Conditions are not satisfied by such date, then the End Date shall be automatically extended to October 16, 2019, and may not extend the Offer beyond two business days prior to the End Date without the prior written consent of the Company.

~~Potentially~~As ~~dilutive~~soon ~~securities~~as ~~representing~~practicable ~~6,301,675~~following Purchaser’s acceptance of shares of Common Stock ~~for~~tendered pursuant to the ~~sixteen~~Offer ~~weeks~~and ~~ended~~upon ~~October~~the terms and subject to the conditions set forth in the Merger Agreement and in accordance with Section 7251(h) of the Delaware General Corporation Law, ~~2018~~Purchaser will merge with and 6into the Company,~~441,045~~ ~~shares~~whereupon the separate existence of ~~Common~~Purchaser ~~Stock~~shall ~~for~~cease and the ~~sixteen~~Company ~~weeks~~shall ~~ended~~be ~~October 8~~the surviving corporation (the “Merger”), ~~2017~~without ~~were~~a ~~excluded~~meeting ~~from~~or vote of stockholders of the ~~computation~~Company. At the effective time of ~~diluted~~the ~~earnings~~Merger ~~per~~(the ~~share~~“Effective ~~because~~Time”), ~~their~~the ~~effect~~shares ~~would~~of ~~have~~Common ~~been~~Stock ~~antidilutive.~~not ~~Potentially~~purchased ~~dilutive~~pursuant ~~securities~~to ~~representing~~the ~~6,501,271~~Offer (other than (i) shares of Common Stock ~~for~~owned by the ~~forty~~Company ~~weeks~~as ~~ended~~treasury ~~October 7~~stock, ~~2018~~(ii) ~~and~~shares 3of Common Stock owned by Parent,~~623~~ Purchaser or their respective subsidiaries,~~034~~ (iii) shares of Common Stock ~~for~~tendered in the ~~forty~~Offer ~~weeks~~and ~~ended~~(iv) ~~October 8,~~shares ~~2017~~of ~~were~~Common ~~excluded~~Stock ~~from~~owned ~~the~~any ~~computation~~by stockholders of ~~diluted~~the ~~earnings~~Company ~~per~~who ~~share~~have ~~because~~perfected their ~~effect~~statutory ~~would~~rights ~~have~~of ~~been~~appraisal ~~antidilutive~~under Section 262 of the Delaware General Corporate Law) will each be converted into the right to receive an amount in cash equal to the Offer Price.

The Merger Agreement includes representations, warranties and covenants of the parties customary for a transaction of this nature. Among other things, the Merger Agreement includes covenants by the parties to take all actions to secure required regulatory approvals, and from the date of the Merger Agreement until the Effective Time, the Company has agreed to conduct its business in the ordinary course of business and has agreed to certain other operating covenants, as set forth more fully in the Merger Agreement.

The Company has also agreed not to solicit or initiate discussions with third parties regarding other acquisition proposals regarding the Company and has agreed to certain restrictions on its ability to respond to such proposals, provided that (x) the Company, subject to the terms and conditions of the Merger Agreement, may enter into negotiations or discussions concerning, or provide confidential information to persons making, certain unsolicited proposals if the Company’s Board of Directors determines in good faith such proposal constitutes or would reasonably be expected to lead to a Superior Offer (as defined in the Merger Agreement), subject to certain rights of Parent pursuant to the terms of the Merger Agreement to negotiate with the Company, and (y) the Company’s Board of Directors may also change its recommendation regarding the Offer for a reason related to an acquisition proposal or unrelated in the context of a Change in Circumstance (as defined in the Merger Agreement), in either case, only if the Company’s Board of Directors determines, after consultation with outside legal counsel, that the failure to take such action would be inconsistent with its fiduciary duties.

The Merger Agreement also contains certain termination provisions for the Company and Parent, including the right of the Company, in certain circumstances, to terminate the Merger Agreement and accept a Superior Offer. The Company will be required to pay Parent a cash termination fee equal to $15,000,000 (approximately 3% of equity value) if, among other reasons, the Merger Agreement is terminated (i) by the Company to enter into an acquisition agreement that constitutes a Superior Offer or (ii) by Parent because the Board of Directors of the Company (x) adversely changes its recommendation to stockholders to accept the Offer and tender their shares of Company Common Stock to Purchaser in the Offer, (y) fails to reject any tender offer or exchange offer by another party within 10 business days following commencement or such offer or (z) (1) the Merger Agreement is terminated by either the Company or Parent because the closing of the Offer has not occurred prior to the End Date or by Parent due to a material breach by the Company, (2) a third party acquisition proposal is publicly disclosed prior to such termination and (3) within 12 months following such termination, the Company consummates a third party acquisition proposal or enters into an agreement for a third party acquisition proposal which is subsequently completed. Parent will be required to pay the Company a cash termination fee equal to $30,000,000 (approximately 6% of equity value) if, among other reasons, the Merger Agreement is terminated by the Company due to Parent or Purchaser’s (i) material breach of its representations or covenants cause the failure of the closing of the Offer (subject to a 30-day cure right), (ii) failure to commence the Offer when it’s required to under the terms of the Merger Agreement, or (iii) failure to close the Offer when all the conditions have been satisfied. In addition, subject to the terms of the Merger Agreement, either the Company or Parent may terminate the Merger Agreement, at any time prior to the time Purchaser accepts for payment the Company Common Stock tendered pursuant to the Offer, if the Merger is not consummated on or before the End Date. The Company expects the transaction to be consummated by the third quarter of 2019.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with Item 1, “Financial Statements” in Part I of this quarterly report on Form 10-Q.

Forward-Looking Statements

The discussion in this quarterly report, including under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part I and Item 1A, “Risk Factors” of Part II, contains forward-looking statements within the meaning of federal securities laws. All statements other than statements of historical fact contained in this quarterly report, including statements regarding our future operating results and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. In many cases, you can identify forward-looking statements by terms such as “may,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions.

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The forward-looking statements contained in this quarterly report reflect our views as of the date hereof about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause our actual results, performance or achievements to differ significantly from those expressed or implied in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements in this quarterly report are reasonable, we cannot guarantee future events, results, performance or achievements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements in this quarterly report, including, without limitation, those factors described in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part I and Item 1A, “Risk Factors” of Part II. Some of the key factors that could cause actual results to differ from our expectations include the following:

· competition in our industry is intense and our failure to compete successfully may adversely affect our sales, financial condition and operating results;

· our growth depends in part on new store openings and our failure to successfully open new stores or successfully manage the potential difficulties associated with store growth could adversely affect our business and stock price;

· we may be unable to maintain or increase comparable store sales, which could adversely affect our business and stock price;

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· real or perceived quality or food safety concerns could adversely affect our business, operating results and reputation;

· inflation and deflation can impact our net sales, inventory, costs of goods sold and gross margin and operating leverage;

· the current geographic concentration of our stores and net sales creates an exposure to local or regional downturns or catastrophic occurrences;

· if we are unable to attract, train and retain, or maintain satisfactory relations with, our employees could impact our ability to grow or successfully operate our business;

· disruption of supplier relationships could adversely affect our business;

· changes in commodity prices and availability may affect our financial condition and operating results;

· any significant interruption in the operations of our distribution centers or common carriers could disrupt our ability to deliver our products in a timely manner;

· our failure to comply with laws, rules and regulations affecting us and our industry could adversely affect our financial condition and operating results;

· disruptions to or security breaches involving our information technology systems, including disruptions related to implementation of new systems or enhancements to existing systems, could harm our ability to run our business;

· we have significant debt service obligations and may incur additional indebtedness in the future, which could adversely affect our financial condition and operating results and our ability to react to changes to our business;

· covenants in our debt agreements restrict our operational flexibility; and

· if our goodwill becomes impaired, we may be required to record a significant charge to earnings.

Readers are urged to consider these factors carefully in evaluating the forward-looking statements in this quarterly report and are cautioned not to place undue reliance on these forward-looking statements. All of the forward-looking statements in this quarterly report are based on information available to us on the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as otherwise required by law.

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Business Overview

We are a value-oriented food retailer serving a diverse and dynamic demographic of household and business customers through two complementary ~~and highly productive~~ store banners. Our Smart & Final stores focus on both household and business customers, and our Smart Foodservice ~~(formerly known as Cash & Carry Smart Foodservice )~~ stores focus primarily on business customers. As of ~~October~~March 724, ~~2018~~2019, we operated ~~324~~327 convenient, non-membership, smaller-box, warehouse-style stores throughout the Western United States, with an additional 15 stores in Northwestern Mexico operated through a joint venture. We have a differentiated merchandising strategy that emphasizes high quality perishables, a wide selection of private label products, products tailored to business and foodservice customers and products offered in a broad range of product sizes, all at “everyday low prices.”

As of ~~October~~March 724, ~~2018~~2019, we operated 260 Smart & Final stores in California, Arizona and Nevada, which offer extensive selections of fresh perishables and everyday grocery items, together with a targeted selection of foodservice, packaging and janitorial products, under both national and private label brands. Customers can choose from a broad range of product sizes, including an assortment of standard-sized products typically found at conventional grocers, and a large selection of larger sized offerings (including uniquely sized national brand products) more typical of warehouse club style stores. Pricing in our Smart & Final stores is targeted to be substantially lower than that of conventional grocers and competitive with that of large discount store operators and warehouse clubs. We believe we offer higher quality produce at lower prices than typically found at large discounters. We also believe our Smart & Final stores provide a better everyday value to household and business customers than typical warehouse clubs by offering greater product selection at competitive prices, with no membership fee requirement, in a convenient, easy-to-shop format.

Within the Smart & Final banner we operate both Extra! and legacy Smart & Final stores. Beginning in late 2008, we launched an initiative to convert our larger legacy Smart & Final stores to our Extra! format. With a larger store footprint and an expanded merchandise selection, our Extra! format offers a one-stop shopping experience with over 16,000 SKUs, over 4,000 more SKUs than our legacy Smart & Final stores, with an emphasis on perishables and household items. As of March 24, 2019, we operated 201 Extra! stores of which 105 represent conversions or relocations of legacy Smart & Final stores and 96 represent new store openings. In recent years we have significantly increased the number of Extra! stores, facilitated primarily by our acquisition of a dedicated perishables warehouse, our acquisition of a group of stores in fiscal year 2016, and by our continued investments in distribution capabilities and in-store merchandising. The continued development of our Extra! store format, through additional new store openings and expansions and relocations of legacy Smart & Final stores to the Extra! store format, is expected to be the cornerstone of future Smart & Final banner growth.

As of March 24, 2019, we also operated 67 Smart Foodservice stores focused primarily on restaurants, caterers and a wide range of other foodservice businesses such as food trucks and coffee houses. We offer customers the opportunity to shop for their everyday foodservice needs in a convenient, no-frills warehouse shopping environment. These stores are located in Washington, Oregon, Northern California, Idaho, Montana, Nevada and Utah. Pricing in our Smart Foodservice stores is targeted to be substantially lower than that of our foodservice delivery competitors, with greater price transparency to customers and no minimum order size. Pricing is also competitive with typical warehouse clubs, with no membership fee requirement. Since late 2014, we have opened 15 new Smart Foodservice stores in existing and new market areas, and are actively pursuing additional growth opportunities for this store banner.

In both store banners, we are actively investing in increasing online sales, including both direct delivery to customers through partner services and using buy online, pick-up-in-store models. As of March 24, 2019, we offered direct delivery or pick up-in-store options in over 98% of our Smart & Final banner and Smart Foodservice stores.

We believe that our “everyday low prices,” unique merchandising strategy and convenient locations enable us to offer a differentiated food shopping experience with broad appeal to a diverse and dynamic customer demographic.

Merger Agreement

On April 16, 2019, the Company entered into the Merger Agreement with Parent and Purchaser. Parent and Purchaser are controlled by certain equity funds managed by Apollo Management IX, L.P., a Delaware limited partnership.

Pursuant to the Merger Agreement, upon the terms and subject to the conditions thereof, Purchaser will commence the Offer no later than May 7, 2019 (unless otherwise agreed to by Parent and the Company) to acquire all of the outstanding shares of Common Stock at the Offer Price of $6.50 net to the holders thereof, payable in cash, without interest and less any applicable tax withholding. Parent intends to fund the Offer Price with a combination of committed debt and equity financing. The transaction is not subject to a financing condition.

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~~Within~~As ~~the~~soon ~~Smart &~~as ~~Final~~practicable ~~banner~~following wePurchaser’s ~~operate~~acceptance ~~both~~of ~~Extra!~~shares ~~and~~of ~~legacy~~Common ~~Smart &~~Stock ~~Final~~tendered ~~stores.~~pursuant ~~Beginning in late 2008, we launched an initiative~~ to ~~convert~~the ~~our~~Offer ~~larger~~and ~~legacy~~upon ~~Smart &~~the ~~Final~~terms ~~stores~~and subject to ~~our~~the ~~Extra!~~conditions ~~format.~~set ~~With~~forth ain ~~larger~~the ~~store~~Merger ~~footprint~~Agreement and anin ~~expanded~~accordance ~~merchandise~~with ~~selection,~~Section 251(h) of ~~our~~the ~~Extra!~~Delaware ~~format~~General ~~offers~~Corporation ~~a one-stop shopping experience with over 16~~Law,~~000~~ ~~SKUs,~~the ~~over~~Merger ~~4,000~~will ~~more~~occur ~~SKUs~~pursuant ~~than~~to ~~our~~which ~~legacy~~Purchaser ~~Smart &~~will ~~Final~~merge ~~stores,~~ with ~~an emphasis on perishables~~ and ~~household~~into ~~items.~~the ~~As of October 7~~Company, ~~2018,~~whereupon wethe ~~operated~~separate ~~199~~existence ~~Extra! stores~~ of ~~which~~Purchaser ~~104~~shall ~~represent~~cease ~~conversions~~and orthe ~~relocations~~Company ~~of legacy~~shall ~~Smart &~~be ~~Final~~the ~~stores~~surviving ~~and~~corporation, 95without ~~represent~~a ~~new~~meeting ~~store~~or ~~openings.~~vote Inof ~~recent~~stockholders ~~years~~of wethe ~~have~~Company. ~~significantly~~At ~~increased~~ the ~~number~~Effective ~~of Extra! stores~~Time, ~~facilitated~~the ~~primarily~~shares byof ~~our~~Common ~~acquisition~~Stock ofnot apurchased ~~dedicated~~pursuant ~~perishables~~to ~~warehouse,~~the ~~our~~Offer ~~acquisition~~(other ofthan ashares ~~group~~ of ~~stores~~Common inStock ~~fiscal~~owned ~~year 2016, and~~ by ~~our~~the ~~continued~~Company ~~investments~~as intreasury ~~distribution~~stock, ~~capabilities~~by ~~and~~Parent ~~in-store~~or ~~merchandising.~~Purchaser ~~The~~or ~~continued~~by ~~development~~stockholders of ~~our~~the ~~Extra!~~Company ~~store~~who ~~format,~~have ~~through~~perfected ~~additional~~their ~~new~~statutory ~~store~~rights ~~openings~~of ~~and~~appraisal ~~expansions~~under ~~and~~Delaware ~~relocations~~General ofCorporate ~~legacy~~Law) ~~Smart &~~will ~~Final~~each ~~stores~~be toconverted into the ~~Extra!~~right ~~store~~to ~~format,~~receive isan ~~expected~~amount equal to be the ~~cornerstone~~Offer ~~of future Smart & Final banner growth~~Price.

AsFor ofmore ~~October 7~~information, ~~2018,~~please werefer ~~also~~to ~~operated~~Note 6414, ~~Smart~~“Subsequent ~~Foodservice stores focused primarily on restaurants~~Events,” ~~caterers~~in ~~and~~Notes ~~a wide range of other foodservice businesses such as food trucks and coffee houses. We offer customers the opportunity~~ to ~~shop~~Unaudited ~~for~~Condensed ~~their~~Consolidated ~~everyday~~Financial ~~foodservice~~Statements ~~needs~~ in ~~a convenient~~Part I, Item ~~no-frills~~1 ~~warehouse~~of ~~shopping~~this ~~environment.~~Quarterly ~~These~~Report ~~stores~~on ~~are located in Washington, Oregon, Northern California,~~Form ~~Idaho~~10-Q, ~~Montana,~~which ~~Nevada and Utah. Pricing in our Smart Foodservice stores~~ is ~~targeted~~hereby toincorporated beby ~~substantially lower than that of our foodservice delivery competitors, with greater price transparency to customers and no minimum order size~~reference. Pricing is also competitive with typical warehouse clubs, with no membership fee requirement. Since late 2014, we have opened 12 new Smart Foodservice stores in existing and new market areas, and are actively pursuing additional growth opportunities for this store banner.

In both store banners, we are actively investing in increasing online sales, including both direct delivery to customers through partner services and using buy online, pick up in store models. As of October 7, 2018, we offered direct delivery or pick up in store options across nearly our entire geographic footprint and fulfil these orders in over 98% of our Smart & Final stores and Smart Foodservice stores.

We believe that our “everyday low prices”, unique merchandising strategy and convenient locations enable us to offer a differentiated food shopping experience with broad appeal to a diverse and dynamic customer demographic.

Outlook

We plan to expand our store footprint, primarily through opening new Extra! stores in existing and adjacent markets, and over time by entering new markets. We believe we have a scalable operating infrastructure to support our anticipated growth which, together with our flexible real estate strategy and advanced distribution capabilities, position us to capitalize on our growth opportunities. During the first three quarters of 2018 we opened three new Extra! stores, relocated two legacy Smart & Final stores to Extra! format stores and did not convert any legacy Smart & Final stores to Extra! format stores. Our 2018 store development plans anticipate one additional new Extra! store. We plan to opportunistically continue to expand our larger legacy Smart & Final stores to our Extra! format and invest in our legacy Smart & Final stores that are not candidates for conversion to the Extra! format by completing major remodel projects and targeted relocations. We also plan to open two additional Smart Foodservice stores in 2018.

In 2019, we plan to open two to three additional Smart & Final Extra! stores and relocate or expand up to three legacy Smart & Final stores to Extra! format stores. We also plan to open four to five new Smart Foodservice stores in 2019.

In addition, we plan to leverage our significant investments in management, information technology systems, infrastructure and marketing to grow our comparable store sales and enhance our operating margins through execution of a number of key initiatives, including initiatives to increase net sales of perishable products in our Smart & Final stores, to increase net sales of private label products in our Smart & Final and Smart Foodservice stores, and to expand our marketing programs in our Smart & Final and Smart Foodservice stores. We expect each of these key initiatives, if successful, to generate increased comparable store sales and also expect our initiative to increase net sales of private label products to enhance our operating margins, as private label products have historically generated higher gross margins relative to national branded products.

Factors Affecting Our Results of Operations

Store Openings

We expect that a primary driver of our growth in sales and gross margin will be the continued development of our Extra! format stores through new store openings and expansions and relocations. We also plan to opportunistically open new Smart Foodservice stores, which will further amplify sales and gross margin. Our results of operations have been and will continue to be materially affected by the timing and number of new store openings, including conversions and relocations of legacy Smart & Final stores to the Extra! format, and the amount of associated costs. For example, we typically incur higher than normal employee costs at the time of a new store opening, ~~conversion~~expansion or relocation associated with set-up and other related costs. Also, our operating margins are typically negatively affected by promotional discounts and other marketing costs associated with new store openings, ~~conversions~~expansions and relocations, as well as higher inventory markdowns and costs related to hiring and training new employees in new stores. Additionally, promotional activities may result in higher than normalized sales in the first several weeks following a new store opening. Our new Extra! and Smart Foodservice stores typically build a customer base over time and reach a mature sales growth rate in the third and fourth year after opening, respectively. As a result, our new stores generally have lower margins and higher operating expenses, as a percentage of sales, than our more mature stores.

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Based on our experience, we expect that certain of our new Extra! stores will impact sales at our existing stores in close proximity in the short-term. However, we believe that over the longer term any such sales impact will be more than offset by future sales growth and expanded market share.

Developments in Competitive Landscape

We operate in the highly competitive U.S. food retail and foodservices industry. We compete on a combination of factors, including price, product selection, product quality, convenience, customer service, store format and location, and digital commerce options. Our principal competitors include conventional grocers such as Albertsons/Safeway and Kroger, warehouse clubs and discounters such as Costco and Aldi, mass merchandisers such as Walmart and Target, foodservice delivery companies such as Sysco and US Foods, online retailers such as Amazon, as well as other specialty stores. Some of our competitors may have greater financial or marketing resources than we do and may be able to devote greater resources to sourcing, promoting and selling their products. These competitors could use these advantages to take certain measures, including reducing prices that could adversely affect our competitive position, business, financial condition and operating results.

Pricing Strategy and Investments in “Everyday Low Prices”

We have a commitment to “everyday low prices”, which we believe positions both our Smart & Final and Smart Foodservice stores as top of mind destinations for our target customers. Pricing in our Smart & Final stores is targeted to be substantially lower than that of conventional grocers and competitive with that of large discounters and warehouse clubs, with no membership fee requirement. Pricing in our Smart Foodservice stores is targeted to be substantially lower than our foodservice delivery competitors, with no membership fee requirement and greater price transparency to customers with no minimum order size, and competitive with typical warehouse clubs.

Our pricing strategy is geared toward optimizing the pricing and promotional activities across our mix of higher-margin perishable items and everyday value-oriented traditional grocery items. This strategy involves determining prices that will improve our operating margins based upon our analysis of how demand varies at different price levels as well as our costs and inventory levels.

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Private Label Products

Private label products are key components of our pricing and merchandising strategy, as we believe they build and deepen customer loyalty, enhance our value proposition, generate higher gross margins relative to national brands and improve the breadth and selection of our product offering. We believe that a strong private label offering has become an increasingly important competitive advantage in the food retail and foodservices industries.

As of ~~October~~March 724, ~~2018~~2019, we had a portfolio of approximately 3,100 private label items, which represented 28% of our Smart & Final banner sales for the ~~forty~~twelve weeks ended ~~October~~March 724, ~~2018~~2019. Typically, our private label products generate a higher gross margin as a percentage of sales as compared to a comparable national brand product.

General Economic Conditions and Changes in Consumer Behavior

The overall economic environment in the markets we serve, particularly California, and related changes in consumer behavior, have a significant impact on our business and results of operations. In general, positive conditions in the broader economy promote customer spending in our stores, while economic weakness results in reduced customer spending. Macroeconomic factors that can affect customer spending patterns, and thereby our results of operations, include employment rates, business conditions, changes in the housing market, the availability of consumer credit, interest rates, tax rates and fuel and energy costs.

Infrastructure Investment

Our historical results of operations reflect the impact of our ongoing investments in infrastructure to support our growth. We have made significant investments in senior management, information technology systems, supply chain systems and marketing. These investments include significant additions to our personnel, including experienced industry executives and management and merchandising teams to support our long-term growth objectives. We plan on continuing to make targeted investments in our infrastructure as necessary to support our growth.

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Inflation and Deflation Trends

Inflation and deflation can impact our financial performance. During inflationary periods, our results of operations can be positively impacted as we sell lower-priced inventory in a higher price environment. In contrast, food deflation could negatively impact our results of operations by reducing sales growth and earnings if our competitors react by lowering their retail pricing. The short-term impact of inflation and deflation is largely dependent on whether or not we pass the effects through to our customers, which is subject to competitive market conditions. In recent inflationary periods, we have generally been able to pass through most cost increases. Beginning in the second quarter of fiscal year ~~2015 and continuing through the first quarter of fiscal year~~ 2017, we experienced deflation in certain food and non-food commodities. Market dynamics caused us to pass cost decreases through to customers, which negatively impacted sales growth and income from operations in certain categories, primarily in proteins, but also in high volume categories like cheese and fresh produce. In the second quarter of fiscal year 2017, we began to experience modest inflation in some of the food and non-food products we sell,. ~~which~~This inflation continued through the ~~second~~first ~~quarter~~half of fiscal year 2018., Inthen turned to deflation in the third quarter of fiscal ~~year~~ 2018, ~~deflation~~before inreturning ~~certain~~to ~~food~~modest ~~and~~inflation ~~non-food~~in ~~commodities~~the ~~returned,~~fourth ~~and~~quarter weof fiscal 2018. We expect ~~such~~overall ~~deflation~~inflation to continue ~~for~~in ~~the remainder of~~ fiscal year ~~2018~~2019.

Components of Results of Operations

Net Sales

We recognize revenue from the sale of products at the point of sale. Discounts provided to customers at the time of sale are recognized as a reduction in sales as the products are sold. Sales tax collections are presented in the statement of operations and comprehensive ~~income~~loss on a net basis and, accordingly, are excluded from reported sales revenues. Proceeds from the sale of our Smart & Final gift cards are recorded as a liability at the time of sale, and recognized as sales when they are redeemed by the customer. Our Smart & Final gift cards do not have an expiration date.

We regularly review and monitor comparable store sales growth to evaluate and identify trends in our sales performance. With respect to any fiscal period during any year, comparable store sales include sales for stores operating both during such fiscal period in such year and in the same fiscal period of the previous year. Sales from a store will be included in the calculation of comparable store sales after the 60th full week of operations, and sales from a store are also included in the calculation of comparable store sales if (i) the store has been physically relocated, (ii) the selling square footage has been increased or decreased or (iii) the store has been converted to a new format within a store banner (e.g., from a legacy Smart & Final store to the Extra! format).

Cost of Sales, Buying and Occupancy and Gross Margin

The major categories of costs included in cost of sales, buying and occupancy are cost of goods sold, distribution costs, costs of our buying department and store occupancy costs, net of earned vendor rebates and other allowances. Distribution costs consist of all warehouse receiving and inspection costs, warehousing costs, all transportation costs associated with shipping goods from our warehouses to our stores, and other costs of our distribution network. Store occupancy costs include store rental, common area maintenance, property taxes, property insurance, and depreciation.

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Gross margin represents sales less cost of sales, buying and occupancy. Our gross margin may not be comparable to other retailers, since not all retailers include all of the costs related to their distribution network in cost of sales like we do. Some retailers exclude a portion of these costs (e.g., store occupancy and buying department costs) from cost of sales and include them in selling, general and administrative expenses.

Our cost of sales, buying and occupancy expense and gross margin are correlated to sales volumes. As sales increase, gross margin is affected by the relative mix of products sold, pricing strategies, inventory shrinkage and improved leverage of fixed costs.

Operating and Administrative Expenses

Operating and administrative expenses include direct store-level expenses associated with displaying and selling our products at the store level, including salaries and benefits for our store work force, fringe benefits, store supplies, advertising and marketing and other store-specific costs. Operating and administrative expenses also consist of store overhead costs and corporate administrative costs including salaries and benefits costs, share-based compensation, corporate occupancy costs, amortization expense, and other expenses associated with being a public company.

We expect that our operating and administrative expenses will increase in future periods resulting from our store development program, including the growth in the number of our stores and as a result of additional legal, accounting, insurance and other expenses associated with being a public company.

Income Tax Provision

We are subject to federal income tax as well as state income tax in various jurisdictions of the United States in which we conduct business. Income taxes are accounted for under the asset and liability method.

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Equity in Earnings of Mexico Joint Venture

Our wholly owned subsidiary, Smart & Final de Mexico S.A. de C.V., is a Mexican holding company that owns a 50% interest in a joint venture. The remaining 50% of the joint venture is owned by Grupo Calimax S.A. de C.V., an entity comprising the investment interests of a family group who are also the owners of the Calimax grocery store chain in Mexico. As of ~~October~~March 724, ~~2018~~2019, this joint venture operated 15 Smart & Final stores in Northwestern Mexico, which are similar in concept to our legacy Smart & Final stores. This joint venture operates as a Mexican domestic corporation under the name Smart & Final del Noroeste, S.A. de C.V. Our interest in this joint venture is not consolidated and is reported using the equity method of accounting.

Factors Affecting Comparability of Results of Operations

Term Loan Facility and Revolving Credit Facility

Our interest expense in any particular period is impacted by our overall level of indebtedness during that period and by changes in the applicable interest rates on such indebtedness.

2017 Tax Cuts and Jobs Act

On December 22, 2017, the Tax Act was enacted into law, which changed various corporate federal income tax provisions of the Internal Revenue Code. Substantially all the provisions of the Tax Act are effective for taxable years beginning after December 31, 2017. We expect that the most significant changes that will impact the Company are the reduction in the corporate federal income tax rate from 35% to 21% and 100% bonus depreciation for qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. In a manner consistent with ASC 740-10-25-47, the effect of a change in tax law or rates shall be recognized at the date of enactment. Accordingly, the Company accounted for the corporate federal income tax rate reduction in the fourth quarter of 2017 (see Note 7, Income Taxes, in the accompanying notes to our consolidated financial statements).

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Basis of Presentation

Our fiscal year is the 52- or 53-week period ending on the Sunday closest to December 31. Each of our 52-week fiscal years consists of twelve-week periods in the first, second and fourth quarters of the fiscal year and a sixteen-week period in the third quarter. Our last completed fiscal year ended on December 3130, ~~2017~~2018 and was a 52-week period.

Results of Operations

The following table summarizes key components of our results of operations for the periods indicated, both in dollars and as a percentage of sales.

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Consolidated Statements of Operations Data

	Sixteen Weeks Ended										Forty Weeks Ended
	Twelve Weeks Ended
	October 7, 2018					October 8, 2017					October 7, 2018					October 8, 2017
	March 24, 2019					March 25, 2018
	(Dollars in thousands, except per share)
Net sales	$	1,~~497~~044,~~669~~802		100.0	%	$	1,~~457~~016,~~353~~237		100.0	%	$	~~3,639,390~~		~~100.0~~	%	$	~~3,502,657~~		~~100.0~~	%
Cost of sales, buying and occupancy	1888,~~265,220~~466			8485.50	%	1869,~~243,490~~975			85.36	%	~~3,090,962~~			~~84.9~~	%	~~2,993,413~~			~~85.5~~	%
Gross margin	~~232~~156,~~449~~336			15.50	%	~~213~~146,~~863~~262			14.74	%	~~548,428~~			~~15.1~~	%	~~509,244~~			~~14.5~~	%
Operating and administrative expenses	~~209~~155,~~890~~038			14.09	%	~~195~~147,~~285~~430			1314.45	%	~~507,892~~			~~14.0~~	%	~~474,021~~			~~13.5~~	%
Income from operations	22,559			1.5	%	18,578			1.3	%	40,536			1.1	%	35,223			1.0	%
Income (loss) from operations	1,298			0.1	%	(1,168		)	-0.1	%
Interest expense, net	1310,~~250~~578			01.80	%	119,~~229~~251			01.80	%	~~32,165~~			~~0.8~~	%	~~27,738~~			~~0.8~~	%
Equity in earnings of joint venture	~~651~~433			—0.1	%	~~362~~577			—0.1	%	~~1,601~~			—	%	~~576~~			—	%
Income before income taxes	9,960			0.7	%	7,711			0.5	%	9,972			0.3	%	8,061			0.2	%
Loss before income taxes	(8,847		)	-0.8	%	(9,842		)	-1.0	%
Income tax benefit (provision)	200			0.0	%	(2,605		)	(0.1	)%	(305		)	0.0	%	(419		)	0.0	%
Income tax benefit	2,170			0.2	%	2,748			0.3	%
Net income	$	10,160		0.7	%	$	5,106		0.4	%	$	9,667		0.3	%	$	7,642		0.2	%
Net loss	$	(6,788	)	-0.6	%	$	(7,094	)	-0.7	%
Per Share Data:
Earnings per share:
Loss per share:
Net income per share - Basic	$	0.14				$	0.07				$	0.13				$	0.11
Net loss per share - Basic	$	(0.09	)			$	(0.10	)
Net income per share - Diluted	$	0.14				$	0.07				$	0.13				$	0.10
Net loss per share - Diluted	$	(0.09	)			$	(0.10	)
Other Operating Data
Comparable store sales growth	02.62		%			1.52		%			~~1.0~~		%			~~0.4~~		%
Smart & Final banner	0.2.4		%			10.0		%			~~0.3~~		%			~~0.1~~		%
Smart Foodservice banner	21.05		%			35.48		%			~~3.4~~		%			~~1.3~~		%
Stores at end of period	~~324~~327					~~316~~323					~~324~~					~~316~~
Smart & Final banner	260					~~253~~260					~~260~~					~~253~~
Extra! format	~~199~~201					~~183~~194					~~199~~					~~183~~
Smart Foodservice banner	6467					63					64					63

~~Sixteen~~Twelve Weeks Ended ~~October~~March 724, ~~2018~~2019 Compared to the ~~Sixteen~~Twelve Weeks Ended ~~October~~March 825, ~~2017~~2018

Net Sales

Net sales for the ~~sixteen~~twelve weeks ended ~~October~~March 724, ~~2018~~2019 increased $4028.36 million, or 2.8%, to $1,~~497~~044.78 million as compared to $1,~~457~~016.42 million for the ~~sixteen~~twelve weeks ended ~~October~~March 825, ~~2017~~2018. This increase in net sales was primarily attributable to net sales of $316.39 million from the opening of ~~eleven~~four new stores ~~since~~in ~~third~~fiscal ~~quarter~~2018 ~~2017~~ and a comparable store sales increase of $921.07 million in our store banners.

For the ~~sixteen~~twelve weeks ended ~~October~~March 724, ~~2018~~2019, comparable store sales increased 02.62% as compared to the ~~sixteen~~twelve weeks ended ~~October~~March 825, ~~2017~~2018. This increase in comparable store sales was attributable to an increase in comparable ~~average~~ transaction ~~size~~count of 10.94% ~~partially~~and ~~offset~~an byincrease ~~a decrease~~ in comparable average transaction ~~count~~size of 1.38%.

For the ~~sixteen~~twelve weeks ended ~~October~~March 724, ~~2018~~2019, net sales for our Smart & Final segment increased $2820.97 million, or 2.6%, to $~~1,144~~815.19 million as compared to $~~1,115~~795.32 million for the ~~sixteen~~twelve weeks ended ~~October~~March 825, ~~2017~~2018. Comparable store sales for our Smart & Final segment increased 0.2.4% as compared to the ~~sixteen~~twelve weeks ended ~~October~~March 825, ~~2017.~~2018, ~~This increase in comparable store sales was~~ attributable to an increase in comparable ~~average~~ transaction ~~size~~count of 10.6% ~~partially~~and ~~offset~~an byincrease ~~a decrease~~ in comparable average transaction ~~count~~size of 1.47%.

For the ~~sixteen~~twelve weeks ended ~~October~~March 724, ~~2018~~2019, net sales for our Smart Foodservice segment increased $117.59 million, or 3.36%, to $~~353~~228.69 million as compared to $~~342~~221.10 million for the ~~sixteen~~twelve weeks ended ~~October~~March 825, ~~2017~~2018. Comparable store sales for our Smart Foodservice segment increased 21.05% as compared to the ~~sixteen~~twelve weeks ended ~~October~~March 825, ~~2017.~~2018, ~~This~~primarily ~~increase in comparable store sales was~~ attributable to an increase in comparable average transaction size of 23.10% and partially offset by a decrease in comparable transaction count of 01.25%.

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As a result of our store growth in existing markets, we also have experienced sales transfer from certain existing stores to new stores. In comparable store sales, we believe that the principal effect of this sales transfer is evidenced in the comparable sales transaction count.

~~Gross Margin~~32

Gross margin for the sixteen weeks ended October 7, 2018 increased $18.6 million, or 8.7%, to $232.4 million as compared to $213.9 million for the sixteen weeks ended October 8, 2017. The increase in gross margin attributable to increased sales was $5.9 million, and $12.7 million was attributable to increased gross margin rate. As a percentage of sales, gross margin was 15.5% for the sixteen weeks ended October 7, 2018 as compared to 14.7% for the sixteen weeks ended October 8, 2017. Compared to the sixteen weeks ended October 8, 2017, gross margin as a percentage of sales for the sixteen weeks ended October 7, 2018 included higher merchandise product margin rates (including the effect of inventory losses) as a percentage of sales, accounting for an increase of 0.93% (consisting of a 0.82% increase related to our Smart & Final segment, and a 0.11% increase related to our Smart Foodservice segment). Warehouse and transportation costs as a percentage of sales increased 0.12% (representing a 0.11% increase related to our Smart & Final segment and a 0.01% increase related to our Smart Foodservice segment). Store occupancy costs as a percentage of sales decreased 0.04% (consisting of a decrease of 0.03% related to our Smart & Final segment and a 0.01% decrease related to our Smart Foodservice segment). This decrease in our Smart & Final segment included a decrease of 0.12% related to stores locations opened prior to 2015, partially offset by a 0.09% increase related to stores opened in 2015 through third quarter 2017.

Operating and Administrative Expenses

Operating and administrative expenses for the sixteen weeks ended October 7, 2018 increased $14.6 million, or 7.5%, to $209.9 million, as compared to $195.3 million for the sixteen weeks ended October 8, 2017. The increase in operating and administrative expenses was primarily due to $9.7 million increase in wages, fringe benefits and incentive bonus costs, $4.5 million increase in other store direct expenses, $0.3 million increase in marketing costs, $0.8 million increase in expense associated with cash surrender values on corporate-owned life insurance policies and other expenses of the SERP, $0.2 million increase in public company costs and $0.5 million increase in costs associated with store closures and asset impairment costs. These increases were partially offset by a $0.6 million decrease in share-based compensation expense associated with our equity compensation program and a $0.8 million decrease in other expenses.

As a percentage of sales, operating and administrative expenses for the sixteen weeks ended October 7, 2018 increased 0.6% to 14.0% as compared to 13.4% for the sixteen weeks ended October 8, 2017. Operating and administrative expenses, as a percentage of sales, increased by 0.43% due to increased wages, benefits and incentive bonuses (including a 0.37% increase related to our Smart & Final segment and 0.06% increase related to our Smart Foodservice segment), 0.22% increase due to other store direct expenses (primarily related to our Smart & Final segment), 0.03% increase in costs related to store closures and asset impairment costs, 0.06% increase in expense associated with cash surrender values on corporate-owned life insurance policies and other expenses of the SERP, and 0.01% increase in public company costs. These increases were offset by a 0.05% decrease in share-based compensation expense associated with our equity compensation program and a 0.07% decrease in other expenses.

Interest Expense, Net

Interest expense for the sixteen weeks ended October 7, 2018 increased $2.0 million, or 18.0%, to $13.3 million as compared to $11.2 million for the sixteen weeks ended October 8, 2017. This increase in interest expense was primarily due to increased average debt outstanding and a slight increase in interest rate.

Income Tax Provision

Our income tax provision for the sixteen weeks ended October 7, 2018 decreased $2.8 million to a $0.2 million income tax benefit as compared to a $2.6 million income tax provision for the sixteen weeks ended October 8, 2017. The effective income tax rate, excluding the equity in earnings of our joint venture, for the sixteen weeks ended October 7, 2018 was an income tax benefit of 2.2% as compared to an income tax provision of 35.5% for the sixteen weeks ended October 8, 2017. The effective tax rate for the sixteen weeks ended October 7, 2018 was lower primarily due to the federal income tax rate cut from 35% to 21% and the favorable adjustment resulting from the reconciliation of our 2017 tax return as filed to our 2017 tax provision, partially offset by the unfavorable impact of the new executive compensation limitations and vesting of restricted stock awards as compared to the sixteen weeks ended October 8, 2017.

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Equity in Earnings of Joint Venture

Equity in earnings of our joint venture for the sixteen weeks ended October 7, 2018 was $0.7 million as compared to $0.4 million for the sixteen weeks ended October 8, 2017.

Forty Weeks Ended October 7, 2018 Compared to the Forty Weeks Ended October 8, 2017

Net Sales

Net sales for the forty weeks ended October 7, 2018 increased $136.7 million, or 3.9%, to $3,639.4 million as compared to $3,502.7 million for the forty weeks ended October 8, 2017. This increase in net sales was primarily attributable to net sales of $101.8 million from the opening of eleven new stores since third quarter 2017 and a comparable store sales increase of $34.9 million in our store banners.

Comparable store sales for the forty weeks ended October 7, 2018 increased 1.0% as compared to the forty weeks ended October 8, 2017. This increase in comparable store sales was primarily attributable to an increase in comparable average transaction size of 2.4% partially offset by a decrease in comparable transaction count of 1.4%.

For the forty weeks ended October 7, 2018, net sales for our Smart & Final segment increased $91.4 million, or 3.4%, to $2,807.7 million as compared to $2,716.4 million for the forty weeks ended October 8, 2017. Comparable store sales for our Smart & Final segment increased 0.3% as compared to the forty weeks ended October 8, 2017, primarily attributable to an increase in comparable average transaction size of 1.9%, partially offset by a decrease in comparable transaction count of 1.6%.

For the forty weeks ended October 7, 2018, net sales for our Smart Foodservice segment increased $45.3 million, or 5.8%, to $831.7 million as compared to $786.3 million for the forty weeks ended October 8, 2017. Comparable store sales for our Smart Foodservice segment increased 3.4% as compared to the forty weeks ended October 8, 2017, primarily attributable to an increase in comparable average transaction size of 3.4%, while comparable transaction count remained the same.

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Gross Margin

Gross margin for the ~~forty~~twelve weeks ended ~~October~~March 724, ~~2018~~2019 increased $3910.20 million, or 7.70%, to $~~548~~156.43 million as compared to $~~509~~146.23 million for the ~~forty~~twelve weeks ended ~~October~~March 825, ~~2017~~2018. The increase in gross margin attributable to increased sales was $194.91 million, and ~~the other~~ $195.39 million ~~increase~~ was ~~primarily~~ attributable to increased gross margin rate. As a percentage of sales, gross margin was 15.10% for the ~~forty~~twelve weeks ended ~~October~~March 724, ~~2018~~2019 as compared to 14.54% for the ~~forty~~twelve weeks ended ~~October~~March 825, ~~2017~~2018. Compared to the ~~forty~~twelve weeks ended ~~October~~March 825, ~~2017~~2018, gross margin as a percentage of sales for the ~~forty~~twelve weeks ended ~~October~~March 724, ~~2018~~2019 included higher merchandise product margin rates (including the effect of inventory losses) as a percentage of sales, accounting for an increase of 0.6357% (~~including~~consisting ~~an increase~~ of a 0.4432% increase related to our Smart & Final segment, and a 0.1925% increase related to our Smart Foodservice segment). Warehouse and transportation costs as a percentage of sales increased 0.07% (representing a 0.0507% increase related to our Smart &Foodservice ~~Final~~ segment, and ano ~~0.02%~~change ~~increase~~ related to our Smart & ~~Foodservice~~Final segment). ~~Store~~Partially offsetting the increases were store occupancy costs, which as a percentage of sales ~~increased~~decreased 0.0410% (consisting of ana ~~increase~~decrease of 0.0214% related to our Smart & Final segment and a 0.0204% increase related to our Smart Foodservice segment). ~~This~~Buying ~~increase~~department costs increased 0.02% in our Smart & Final segment ~~included an increase of 0~~.~~11% related to stores opened in 2015 through third quarter 2017, partially offset by a 0.09% decrease related to store locations opened prior to 2015.~~

Operating and Administrative Expenses

Operating and administrative expenses for the ~~forty~~twelve weeks ended ~~October~~March 724, ~~2018~~2019 increased $337.96 million, or 75.12%, to $~~507~~155.90 million, as compared to $~~474~~147.04 million for the ~~forty~~twelve weeks ended ~~October~~March 825, ~~2017~~2018. The increase in operating and administrative expenses was primarily due to a $206.17 million increase in wages, fringe benefits and incentive bonus costs, $62.72 million increase in other store direct expenses, $10.6 1 million increase in ~~share-based~~marketing ~~compensation~~costs, ~~expense~~$0.2 ~~associated~~million ~~with~~increase ~~our~~in ~~equity~~public ~~compensation~~company ~~program,~~costs and $0.5 million increase in ~~marketing~~other ~~costs,~~expenses. These increases were partially offset by a $10.7 6 million ~~increase~~decrease in ~~costs~~share-based compensation expense associated with ~~store~~our ~~closure~~equity ~~and~~compensation ~~asset impairment costs~~program, $10.16 million ~~increase~~decrease in expense associated with cash surrender values on corporate-owned life insurance policies and other expenses of the SERP, and $21.31 million ~~increase~~decrease in ~~other~~costs ~~expenses~~associated ~~mainly~~with ~~due~~store toclosures ~~higher~~and ~~information~~asset ~~technology~~impairment ~~consulting fees~~costs.

As a percentage of sales, operating and administrative expenses for the ~~forty~~twelve weeks ended ~~October~~March 724, ~~2018~~2019 increased 0.53% to 14.08% as compared to 1314.5% for the ~~forty~~twelve weeks ended ~~October~~March 825, ~~2017~~2018. Operating and administrative expenses, as a percentage of sales, increased by 0.2439% due to increased wages, benefits and incentive bonuses (including a 0.1735% increase related to our Smart & Final segment and 0.0704% increase related to our Smart ~~Foodservices~~Foodservice segment), ~~0.03%~~ ~~due to increased share-based compensation expense associated with our equity compensation program,~~ 0.0715% ~~due to an~~ increase in other store direct expenses (primarily related to our Smart & Final segment), and 0.0402% increase in public company costs. ~~related~~These increases were offset by a 0.06% decrease due to ~~store~~decreased ~~closures~~share-based ~~and~~compensation ~~asset~~expense ~~impairment~~associated ~~costs~~with our equity compensation program, 0.0305% ~~due~~decrease toin expense associated with cash surrender values on corporate-owned life insurance policies and other expenses of the SERP, ~~and~~ 0.0301% ~~due~~decrease toin ~~increased~~marketing ~~other~~costs, ~~expenses~~0.11% ~~primarily~~decrease ~~due~~in tocosts ~~higher~~related ~~information~~to ~~technology~~store ~~consulting~~closures ~~fees.~~and ~~These~~asset ~~increases~~impairment ~~were~~costs ~~offset~~and ~~by a~~ 0.0203% due to decrease in ~~marketing~~other ~~costs~~expenses.

Interest Expense, Net

Interest expense for the ~~forty~~twelve weeks ended ~~October~~March 724, ~~2018~~2019 increased $41.43 million, or 1614.03%, to $3210.26 million as compared to $279.73 million for the ~~forty~~twelve weeks ended ~~October~~March 825, ~~2017~~2018. This increase in interest expense was primarily due to ~~both~~increase ~~increased~~in ~~average~~interest ~~debt~~rate ~~outstanding~~ and ~~interest~~partially ~~rate~~offset by a slight decrease in average debt outstanding.

Income Tax ~~Provision~~Benefit

Our income tax ~~provision~~benefit for the ~~forty~~twelve weeks ended ~~October~~March 724, ~~2018~~2019 decreased $0.16 million to a ~~provision of~~ $02.32 million income tax benefit as compared to a $02.47 million ~~provision~~income tax benefit for the ~~forty~~twelve weeks ended ~~October~~March 825, ~~2017~~2018. The effective income tax rate, ~~excluding the equity in earnings of our joint venture,~~ for the ~~forty~~twelve weeks ended ~~October~~March 724, ~~2018~~2019 was aan ~~provision~~income tax benefit of 324.15% as compared to aan ~~provision~~income tax benefit of 527.69% for the ~~forty~~twelve weeks ended ~~October~~March 825, ~~2017~~2018. The lower effective tax rate for the ~~forty~~twelve weeks ended ~~October~~March 724, ~~2018~~2019 ~~was~~as ~~primarily~~compared ~~due~~ to the ~~favorable~~twelve ~~impact~~weeks ofended ~~the~~March 25, ~~federal~~2018 ~~income~~was ~~tax~~primarily ~~rate~~due ~~cut~~to ~~from~~changes ~~35%~~ to ~~21%,~~ the ~~adjustment~~cash ~~resulting~~surrender ~~from~~value ~~the reconciliation~~ of ~~our~~corporate-owned ~~2017~~life ~~tax~~insurance ~~return~~policies asand ~~filed~~an toincrease ~~our~~in ~~2017~~ tax ~~provision and certain tax~~ credits, partially offset by ~~the unfavorable impact of the new~~ executive compensation limitations~~, state income tax expense and the vesting of restricted stock awards~~. The effective tax rate for the forty weeks ended October 8, 2017 was primarily impacted by favorable excess tax benefits from stock option award exercises and restricted stock vesting, partially offset by the unfavorable impact of executive compensation limitations and state income tax expense.

~~Equity in Earnings of Joint Venture~~33

Equity in earnings of our joint venture for the forty weeks ended October 7, 2018 was $1.6 million as compared to $0.6 million for the forty weeks ended October 8, 2017.

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Equity in Earnings of Joint Venture

Equity in earnings of our joint venture for the twelve ended March 24, 2019 was $0.4 million as compared to $0.6 million for the twelve weeks ended March 25, 2018.

Liquidity and Capital Resources

Historically, our primary source of liquidity has been cash flows from operations. Additionally, we have the availability to make borrowings under our Credit Facilities. Our primary uses of cash are for purchases of inventory, operating expenses, capital expenditures primarily for opening, converting or remodeling stores and debt service. As of ~~October~~March 724, ~~2018~~2019, we had $35.0 million drawn under our Revolving Credit Facility and $6257.29 million of cash and cash equivalents.

The following table sets forth the major sources and uses of cash for each of the periods set forth below, as well as our cash and cash equivalents at the end of each period.

(dollars in thousands)	~~Forty~~Twelve Weeks Ended ~~October~~March 724, ~~2018~~2019			~~Forty~~Twelve Weeks Ended ~~October~~March 825, ~~2017~~2018
Cash and cash equivalents at end of period	$	6257,~~174~~872		$	6055,~~890~~790
Cash provided by operating activities	~~109~~12,~~457~~051			~~128~~18,~~040~~195
Cash used in investing activities	(~~107~~26,~~935~~137		)	(~~116~~28,~~312~~987		)
Cash used in financing activities	(11,019		)	(5,073		)
Cash provided by (used in) financing activities	4,741			(5,089		)

Operating Activities

Cash flows from operating activities consist of net ~~income~~loss adjusted for non-cash items including depreciation and amortization, and share-based compensation and the effect of working capital changes. The increase or decrease in cash provided by operating activities for the ~~forty~~twelve weeks ended ~~October~~March 724, ~~2018~~2019 and ~~October~~March 825, ~~2017~~2018 reflects our operating performance before non-cash expenses and charges and including the timing of receipts and disbursements.

Cash provided by operating activities for the ~~forty~~twelve weeks ended ~~October~~March 724, ~~2018~~2019 decreased $~~18.~~6.1 million to $~~109~~12.51 million as compared to $~~128~~18.02 million for the ~~forty~~twelve weeks ended ~~October~~March 825, ~~2017~~2018. This decrease was primarily attributable to ~~higher~~increase in working capital for the twelve weeks ended March 24, 2019 as compared to the prior year period. During the ~~forty~~twelve weeks ended ~~October~~March 724, ~~2018~~2019, we made cash interest payments of $296.27 million and did not make any cash pension contributions ~~of $8.9 million~~, as compared to cash interest payments of $261.21 million and cash pension contributions of $90.74 million during the ~~forty~~twelve weeks ended ~~October~~March 825, ~~2017~~2018.

Investing Activities

Cash used in investing activities decreased $82.49 million to $~~107~~26.91 million for the ~~forty~~twelve weeks ended ~~October~~March 724, ~~2018~~2019 as compared to $~~116~~29.30 million in the ~~forty~~twelve weeks ended ~~October~~March 825, ~~2017~~2018. This decrease was primarily attributable to a $113.23 million decrease in capital expenditures for property, plant and equipment, a $10.81 million ~~decrease~~received inas proceeds on the sale of assets ~~and a $0.3 million decrease in other~~, partially offset by a $10.34 million increase in capital expenditures for capitalized software.

Financing Activities

Cash provided by (used in) financing activities increased $5.9 .8 million to cash provided by of $114.07 million for the ~~forty~~twelve weeks ended ~~October~~March 724, ~~2018~~2019, as compared to cash used of $5.1 million for the ~~forty~~twelve weeks ended ~~October~~March 825, ~~2017~~2018. This increase was primarily attributable to a $5217.0 million ~~reduction~~addition in net borrowings on our Revolving Credit Facility, partially offset by a $10.9 3 million decrease in proceeds from exercise of stock options, and a $16.~~8 million reduction in borrowings associated with a promissory note, partially offset by a $35.~~7 million ~~increase~~decrease in cash received from ~~landlord~~landlords related to financing lease obligations~~, a $12~~.~~9 million decrease in cash used for repurchases of Common Stock, and a $1.2 million reduction in payment of minimum withholding taxes on net share settlement of stock option exercises.~~

At ~~October~~March 724, ~~2018~~2019, we had cash and cash equivalents of $6257.29 million, stockholders’ equity of $~~423~~293.56 million and debt, less debt issuance costs, of $653.07 million. At ~~October~~March 724, ~~2018~~2019, we had working capital of $1835.40 million as compared to $358.62 million of ~~negative~~ working capital deficit at ~~October~~March 825, ~~2017~~2018, primarily due to ~~reduction~~increased ofpayments on our Revolving Credit Facility.

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Contractual Obligations

The following table sets forth our future payments due by period of our contractual obligations as of October 7, 2018, in thousands:

	Total		Less than one year		1 - 3 Years		3 - 5 Years		Thereafter
Long-term debt	$	660,000	$	35,000	$	—	$	625,000	$	—
Interest on long-term debt	168,985		39,236		84,322		45,427		—
Operating leases	1,469,354		139,629		270,448		225,395		833,882
Capital and financing lease obligations	56,881		3,189		6,378		6,622		40,692
Total contractual obligations	$	2,355,220	$	217,054	$	361,148	$	902,444	$	874,574

The primary changes in our contractual obligations as of October 7, 2018 as compared to our contractual obligations as of December 31, 2017 relate to additional leases entered into primarily related to our new store growth, partially offset by payments made in the forty weeks ended October 7, 2018.

Smart & Final’s interest rate swap expired March 29, 2018 without a new interest rate swap being initiated. See Note 4, Debt, to our unaudited condensed consolidated financial statements for additional information on our interest requirements.

Purchase orders or contracts for the purchase of goods for resale in our stores and other goods and services are not included in the table above. We are not able to reasonably determine the aggregate amount of such purchase orders that may constitute established contractual obligations, as purchase orders may represent individual authorizations to purchase rather than binding agreements. Other than with respect to Unified Grocers (as described immediately below), we do not have significant agreements for the purchase of goods for resale in our stores or other goods and services that exceed our expected requirements or that are not cancelable on short notice.

We have a contractual obligation under our supply agreement with Unified Grocers to purchase a minimum amount of food and related items during any twelve-month period covered by the agreement. This contractual obligation does not exceed our expected requirements over any twelve-month period covered by the agreement. This agreement expires in December 2018. The related amounts are not included in the above table.

The table above also excludes funding of pension and other postretirement benefit and postemployment obligations. See Note 6, Retirement Benefit Plans and Postretirement and Postemployment Benefit Obligations, to our unaudited condensed consolidated financial statements for additional information on funding of our plans.

We also have asset retirement obligations with respect to owned or leased properties. Due to the nature of our business, such asset retirement obligation is immaterial.

Off-Balance Sheet Arrangements

As of ~~October~~March 724, ~~2018~~2019, we had no off-balance sheet arrangements.

Critical Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (‘‘U.S. GAAP’’) requires management to make estimates and assumptions that affect the reported assets, liabilities, sales and expenses in the accompanying financial statements. Critical accounting estimates are those that require the most subjective and complex judgments, often employing the use of estimates about the effect of matters that are inherently uncertain. These critical accounting estimates, under different conditions or using different assumptions or estimates, could show materially different results on our financial condition and results of operations. The following are considered our most critical accounting estimates that, under different conditions or using different assumptions or estimates, could show materially different results on our financial condition and results of operations.

Share-Based Compensation

We account for share-based compensation in accordance with ASC 718, Compensation—Stock Compensation (“ASC 718”). ASC 718 requires all share-based payments to be recognized in the condensed consolidated statements of operations and comprehensive income as compensation expense based on their fair values over the requisite service period of the award, taking into consideration estimated forfeiture rates.

We use the Black-Scholes-Merton option-pricing model to estimate the fair value of the options on the date of each grant. The Black-Scholes-Merton option-pricing model utilizes highly subjective and complex assumptions to determine the fair value of share-based compensation, including the option’s expected term and price volatility of the underlying stock. The methods used to develop our assumptions are discussed further in Note 8, Share-Based Compensation, in the accompanying notes to our audited consolidated financial statements.

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Critical Accounting Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported assets, liabilities, sales and expenses in the accompanying financial statements. Critical accounting estimates are those that require the most subjective and complex judgments, often employing the use of estimates about the effect of matters that are inherently uncertain. These critical accounting estimates, under different conditions or using different assumptions or estimates, could show materially different results on our financial condition and results of operations. The following are considered our most critical accounting estimates that, under different conditions or using different assumptions or estimates, could show materially different results on our financial condition and results of operations.

Share-Based Compensation

We account for share-based compensation in accordance with ASC 718, Compensation—Stock Compensation (“ASC 718”). ASC 718 requires all share-based payments to be recognized in the statements of operations and comprehensive loss as compensation expense based on their fair values over the requisite service period of the award, taking into consideration estimated forfeiture rates.

We use the Black-Scholes-Merton option-pricing model to estimate the fair value of the options on the date of each grant. The Black-Scholes-Merton option-pricing model utilizes highly subjective and complex assumptions to determine the fair value of share-based compensation, including the option’s expected term and price volatility of the underlying stock. The methods used to develop our assumptions are discussed further in Note 9, Share-Based Compensation, in the accompanying notes to our audited consolidated financial statements.

In addition to assumptions used in the Black-Scholes-Merton option pricing model, we must also estimate a forfeiture rate to calculate the share-based compensation cost for our awards. Our forfeiture rate is based on an analysis of our actual historical forfeitures and consideration of future expected forfeiture rates.

The assumptions referred to above represent management’s best estimates. These estimates involve inherent uncertainties and the application of management’s judgment. If these assumptions change and different factors are used, our share-based compensation expense could be materially different in the future. We do not believe there is a reasonable likelihood that changes in the assumptions used in our estimates will have a material effect on our financial condition or results of operations in future periods. Changes in future share-based compensation expense related to these awards may result from changes in forfeiture rates. However, we do not believe there is a reasonable likelihood that such changes will be material.

We recognize compensation cost for graded vesting awards as if they were granted in multiple awards. We believe the use of this “multiple award” method is preferable because a stock option grant or a restricted stock grant with graded vesting is effectively a series of individual grants that vests over various periods. Management also believes that this provides for better matching of compensation costs with the associated services rendered throughout the applicable vesting periods.

Inventories

Inventories consist of merchandise purchased for resale which is stated at the lower of the weighted-average cost (which approximates first-in, first-out (“FIFO”)) or ~~net realizable value~~market. We provide for estimated inventory losses between physical inventory counts at our stores based upon historical inventory losses as a percentage of sales. Physical inventory counts are conducted on a recurring and frequent basis throughout the year. The provision for inventory loss is adjusted periodically to reflect updated trends of actual physical inventory count results. Historically, our actual physical inventory count results have shown our estimates to be materially reliable. We do not believe there is a reasonable likelihood that changes in our estimates will have a material effect on our financial condition or results of operations in future periods.

The proper valuation of inventory also requires us to estimate the net realizable value of our slow-moving inventory at the end of each period. We base net realizable values upon many factors, including historical recovery rates, the aging of inventories on hand, the inventory movement of specific products and the current economic conditions. When we have determined inventory to be slow-moving, the inventory is reduced to its net realizable value by recording an obsolescence valuation allowance. We believe these risks are largely mitigated because our inventory typically turns on average in less than three months.

With regard to the proper valuation of inventories, we review our valuation methodologies on a recurring basis and make refinements where the facts and circumstances dictate.

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Goodwill and Intangible Assets

We account for goodwill and identified intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other. Goodwill and identifiable intangible assets with indefinite lives are not amortized, but instead are evaluated on an annual basis for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired.

We evaluate goodwill for impairment by comparing the fair value of each reporting unit to its carrying value including the associated goodwill. We have designated our reporting units to be our Smart & Final banner and our Smart Foodservice banner. We determine the fair value of the reporting units using a combination of the income approach methodology of valuation that utilizes the discounted cash flow method as well as other generally accepted valuation methodologies including the market comparable and market transaction methods.

Determining market values using a discounted cash flow method requires that we make significant estimates and assumptions, including long-term projections of cash flows, market conditions and appropriate market rates. Our judgments are based on historical experience, current market trends and other information. In estimating future cash flows, we rely on internally generated forecasts for operating profits and cash flows, including capital expenditures. Critical assumptions include projected comparable store sales growth, timing and number of new store openings, operating profit rates, general and administrative expenses, direct store expenses, capital expenditures, discount rates, royalty rates and terminal growth rates. We determine discount rates based on the weighted average cost of capital of a market participant. Such estimates are derived from our analysis of peer companies and consider the industry weighted average return on debt and equity from a market participant perspective. We also use comparable market earnings multiple data and market transaction data in determining market values. Factors that could cause us to change our estimates of future cash flows include a prolonged economic crisis, successful efforts by our competitors to gain market share in our core markets, our inability to compete effectively with other retailers or our inability to maintain price competitiveness. We also evaluate the market capitalization of the Company in corroborating the reasonableness of the underlying reporting unit valuations. In the fourth quarter of fiscal year ~~2017~~2018, we completed our quantitative assessment of potential goodwill impairment and concluded that the fair value of the Smart Foodservice reporting unit exceeded its carrying value, by approximately 79%. Based on this excess of fair value over carrying value, we believe that reasonable variations in the estimates and assumptions used in our impairment analysis for the Smart Foodservice reporting unit would not result in an indication that the reporting unit’s goodwill may be impaired. In the fourth quarter of fiscal year 2018, we also completed our quantitative assessment of potential goodwill impairment associated with the Smart & Final reporting unit and concluded that the fair value fell short of its carrying value, resulting in a goodwill impairment charge of $94.0 million. This is discussed further in Note 2, Significant Accounting Policies—Goodwill and Intangible Assets in the accompanying notes to our audited consolidated financial statements. If certain future events occur, such as changes to the Company’s long-term store growth and development plans, changes in the assumptions used to estimate the fair value of the Smart & Final banner reporting unit or a prolonged depression of the Company’s market capitalization, the Smart & Final banner reporting unit’s goodwill may require a subsequent impairment charge to be taken.

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completed our quantitative assessment of potential goodwill impairment and concluded that the fair value of the Smart Foodservice reporting unit exceeded its carrying value, by over 109%. Based on this excess of fair value over carrying value, we believe that reasonable variations in the estimates and assumptions used in our impairment analysis for the Smart Foodservice reporting unit would not result in an indication that the reporting unit’s goodwill may be impaired. In the fourth quarter of fiscal year 2017, we also completed our quantitative assessment of potential goodwill impairment associated with the Smart & Final reporting unit and concluded that the fair value fell short of its carrying value, resulting in a goodwill impairment charge of $180.0 million. This is discussed further in Note 2, Significant Accounting Policies—Goodwill and Intangible Assets in the accompanying notes to our audited consolidated financial statements. If certain future events occur, such as changes to the Company’s long-term store growth and development plans, changes in the assumptions used to estimate the fair value of the Smart & Final banner reporting unit or a prolonged depression of the Company’s market capitalization, the Smart & Final banner reporting unit’s goodwill may require a subsequent impairment charge to be taken.

We evaluate our indefinite-lived intangible assets associated with trade names using a two-step approach. The first step screens for potential impairment by comparing the fair value of each trade name with its carrying value. The second step measures the amount of impairment. We determine the fair value of the indefinite-lived trade names using a “relief from royalty payments” methodology. This methodology involves estimating reasonable royalty rates for each trade name and applying these royalty rates to a revenue stream and discounting the resulting cash flows to determine fair value. In the periods presented, we did not recognize any indefinite-lived trade name impairment loss as a result of such evaluation.

Finite-lived intangible assets, like other long-lived assets as required by ASC 360 (as defined below), are subject to review for impairment whenever events or changes in circumstances indicate that the carrying amount of the finite-lived intangible asset may not be recoverable. Impairment is recognized to the extent the sum of the discounted estimated future cash flows from the use of the finite-lived intangible asset is less than the carrying value.

Impairments of Long-Lived Assets

In accordance with ASC 360, Property, Plant, and Equipment, (“ASC 360”), we assess our long-lived assets, including property, plant and equipment and assets under ~~capital~~financing leases, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We believe that impairment assessment of long-lived assets is critical to the financial statements because the recoverability of the amounts, or lack thereof, could significantly affect our results of operations. Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, amount of such cash flows, and the asset’s residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available. We use internal discounted cash flow estimates and independent appraisals as appropriate to determine fair value. We derive the required cash flow estimates from our historical experience and our internal business plans and apply an appropriate discount rate. We group and evaluate long-lived assets for impairment at the individual store level, which is the lowest level at which individual identifiable cash flows are available. We regularly review our stores’ operating performance for indicators of impairment, which include a significant underperformance relative to expected historical or projected future results of operations or a significant negative industry or economic trend.

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Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its future undiscounted cash flows, an impairment charge is recognized equal to the excess of the carrying value over the estimated fair value of the asset. We measure the fair value of our long-lived assets on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy.

Capitalized software costs are subject to review for impairment whenever events or changes in circumstances indicate that the carrying amount of the capitalized software may not be recoverable, whether it is in use or under development. Impairment is recognized to the extent the sum of the future discounted cash flows from the use of the capitalized software is less than the carrying value.

Application of alternative assumptions, such as changes in estimates of future cash flows, could produce significantly different results. Because of the significance of the judgments and estimation processes, it is likely that materially different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change.

Income Taxes

Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. We are subject to income taxes in the United States and Mexico.

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Income taxes are accounted for under the balance sheet model for recording current and deferred taxes. Deferred tax assets and liabilities are measured using currently enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities for a change in tax rates is recognized in income in the period that includes the enactment date. Under applicable accounting guidance, we are required to evaluate the realizability of our deferred tax assets. The realization of our deferred tax assets is dependent upon all available evidence, both positive and negative, including reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies and results of recent operations. The assumptions about future taxable income require the use of significant judgment and are consistent with the plans and estimates we are using to manage our underlying businesses. We consider objective historical evidence when evaluating future taxable income, including three years of cumulative operating income (loss). Applicable accounting guidance requires that we recognize a valuation allowance when it is more likely than not that all or a portion of a deferred tax asset will not be realized due to the inability to generate sufficient taxable income in future periods. Accordingly, significant accounting judgment is required in our assessment of deferred tax assets and valuation allowances when determining the provision for income taxes and related accruals.

The calculation of our tax liabilities involves uncertainties in the application of complex tax laws and regulations in different jurisdictions. A tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, which includes resolution of any related appeals or litigation processes, on the basis of the technical merits.

We record unrecognized tax benefits as liabilities and adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our estimates of unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.

Self-Insurance

We have various insurance programs related to our risks and costs associated with workers’ compensation and general liability claims. We have elected to purchase third-party insurance to cover the risk in excess of certain dollar limits established for each respective insurance program.

We ~~are also responsible for the payment of claims less than the insured amount. We~~ establish estimated accruals for our insurance programs based on certain factors, including available claims data, historical trends and experience, as well as projected ultimate costs of the claims. These accruals are based on estimates prepared with the assistance of outside actuaries, and the ultimate cost of these claims may vary from initial estimates and established accruals. We believe that the use of actuarial studies to determine self-insurance accruals represents a consistent method of measuring these subjective estimates. The actuaries periodically update their estimates and we record such adjustments in the period in which such determination is made. The inherent uncertainty of future loss projections could cause actual claims to differ from our estimates. Because of the significance of the judgments and estimation processes, it is likely that materially different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. For example, a 5% change in our insurance and self-insured claims liabilities at December 3130, ~~2017~~2018, excluding the risk in excess of certain dollar limits related to self-insured program with our third-party insurance carriers, would have affected pre-tax income by approximately $2.36 million for fiscal year ~~2017~~2018. Historically, periodic adjustments to our estimates have not been material.

Closed Store Reserve

We maintain reserves for costs associated with closures of operating stores and other properties that are no longer being utilized in current operations. In the event a leased store is closed before the expiration of the associated lease, the discounted remaining lease obligation less estimated sublease rental income, asset impairment charges related to improvements and fixtures, inventory write-downs and other miscellaneous closing costs associated with the disposal activity are recognized when the store closes.

Adjustments to closed stores and other properties reserves primarily relate to changes in estimated timing and amounts of subtenant income or actual exit costs differing from original estimates. Adjustments are made for changes in estimates in the period in which the changes become known. Because of the significance of the judgments and estimation processes, it is likely that materially different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. For example, a 5% change in our closed stores and other properties reserves at December 31, 2017, would have affected pre-tax income by approximately $0.4 million for fiscal year 2017.

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Retirement Benefit Plans and Postretirement Benefit Plans

Certain of our employees are covered by a funded noncontributory qualified defined benefit pension plan. U.S. GAAP requires that we measure the benefit obligations and fair value of plan assets that determine our plans’ funded status as of our fiscal year end date.

The determination of our obligation and expense for retirement benefit plans and postretirement benefit plans is dependent, in part, on our selection of certain assumptions used by us and our actuaries in calculating such amounts. Those assumptions are described in Note 7, Retirement Benefit Plans and Postretirement and Postemployment Benefit Obligations, in ~~our~~the ~~Annual~~accompanying ~~Report~~notes onto ~~Form 10-K~~our ~~filed~~audited ~~with~~consolidated ~~the~~financial ~~SEC on March 16, 2018~~statements. Pension assumptions are significant inputs to the actuarial models that measure pension benefit obligations and related effects on operations. Three assumptions, among others—discount rate, expected long-term return on plan assets and rate of compensation increases—are important elements of plan expense and asset/liability measurement. We evaluate these critical assumptions at least annually. We periodically evaluate other assumptions involving demographic factors, such as retirement age, mortality and turnover, and update them to reflect our experience and expectations for the future. In ~~2017~~2018, the Society of Actuaries released revised mortality scales, which update life expectancy assumptions. In consideration of these scales, we modified the mortality assumptions used in determining our retirement benefit plans and postretirement benefit plans as of December 3130, ~~2017~~2018. The impact of these updated mortality assumptions resulted in a slight decrease to our pension, supplemental executive retirement plan (“SERP”) and postretirement benefit plan obligations and a slight decrease in future related expense. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors.

In accordance with U.S. GAAP, the amount by which actual results differ from the actuarial assumptions is accumulated and amortized over future periods and, therefore, affects recognized expense in such future periods. While we believe our assumptions are appropriate, significant differences in actual results or significant changes in our assumptions may materially affect our pension and other postretirement obligations and future expenses.

We determine the discount rate using current investment yields on high quality fixed- income investments. The discount rate assumption used to determine the year-end projected benefit obligation is increased or decreased to be consistent with the change in yield rates for high quality fixed-income investments for the expected period to maturity of the pension benefits. A lower discount rate increases the present value of benefit obligations and increases pension expense. The discount rate used to determine benefit obligations for our defined benefit pension plan as of December 3130, ~~2017~~2018 was 34.7540%. The discount rate used to determine benefit obligations under our SERP as of December 3130, ~~2017~~2018 was 3.1986%. The discount rate used to determine benefit obligations under our postretirement benefit plan as of December 3130, ~~2017~~2018 was 34.7035%.

We determine the expected long-term rate of return on plan assets for our defined benefit pension plan using an allocation approach that considers diversification and rebalancing for a portfolio of assets invested over a long-term time horizon. The approach relies on the historical returns of the plan’s portfolio as well as relationships between equities and fixed income investments, consistent with the widely accepted capital market principle that a diversified portfolio with a larger allocation to equity investments have historically generated a greater long -term return. For fiscal year ~~2017~~2018, the Company’s assumed rate of return for our defined benefit pension plan was 6.7500%.

Sensitivity to changes in the major assumptions for our benefit plans are as follows (dollars in thousands):

Assumption	Change	Projected benefit obligation (decrease)increase	Expense (decrease) increase
Defined benefit pension plan:
Discount rate	+/–- 50 bps	$(2018,~~886~~823)/$2320,~~799~~503	$(40223)/$~~414~~409
Expected long-term return on plan assets	+/–- 50 bps	—	(~~858~~767)~~858~~767
SERP:
Discount rate	+/–- 50 bps	(1,~~316~~104)/1,~~416~~182	~~108~~95/~~547~~(103)
Postretirement benefit plan:
Discount rate	+/–- 50 bps	(~~1,119~~902)/1,~~251~~009	(795)/661

Vendor Rebates and Other Allowances

As a component of our consolidated procurement program and consistent with standard practices in the retail industry, we frequently enter into contracts with vendors that provide for payments of rebates or other allowances. These rebates and allowances are primarily comprised of volume or purchase-based incentives, advertising allowances and promotional discounts. The purpose of these incentives and allowances is generally to help defray the costs we incur for stocking, advertising, promoting and selling the vendor’s products.

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Vendor Rebates and Other Allowances

As prescribed by U.S. GAAP, these vendor payments are reflected in the carrying value of the inventory when earned or as progress is made toward earning the rebate or allowance and as a component of cost of sales as the inventory is sold. Certain of these vendor contracts provide for rebates and other allowances that are contingent upon us meeting specified performance measures such as a cumulative level of purchases over a specified period of time. Such contingent rebates and other allowances are given accounting recognition at the point at which achievement of the specified performance measures are deemed to be probable and reasonably estimable. We review the relevant or significant factors affecting proper performance measures, rebates and other allowances on a recurring basis and make adjustments where the facts and circumstances dictate. We do not believe there is a reasonable likelihood that changes in the assumptions used in our estimate will have a material effect on our financial condition or results of our operations in future periods.

Recently Issued Accounting Pronouncements

See Note 3, Recent Accounting Pronouncements, to our accompanying unaudited condensed consolidated financial statements contained elsewhere in this Quarterly Report on Form 10-Q. We have determined that all other recently issued accounting standards will not have a material impact on our consolidated financial statements, or do not apply to our operations.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

~~Market~~We ~~risk~~are ~~represents~~a ~~the~~smaller ~~risk~~reporting ofcompany, ~~changes~~as indefined ~~the value of market risk sensitive instruments caused~~ by ~~fluctuations~~Rule 12b-2 inunder ~~interest~~the ~~rates,~~Securities ~~foreign exchange rates~~ and ~~commodity~~Exchange ~~prices.~~Act ~~Changes~~of in1934 ~~these~~and ~~factors could cause fluctuations~~ in ~~the~~Item ~~results~~ 301(c) of ~~our~~Regulation ~~operations~~S-K, and ~~cash flows. In the ordinary course of business, we~~ are ~~primarily~~not ~~exposed~~required to ~~foreign~~provide ~~currency~~the ~~and~~information ~~interest~~under ~~rate~~this ~~risks~~item. ~~We do not use derivative financial instruments in connection with these commodity market risks.~~

Commodity Risk

We are subject to volatility in food costs as a result of market risk associated with commodity prices. Although we typically are able to mitigate these cost increases, our ability to continue to do so, either in whole or in part, may be limited by the competitive environment we operate in.

Interest Rate Market Risk

Based on our variable rate debt balance as of October 7, 2018, a 1% increase in interest rates would increase our annual interest cost by approximately $6.3 million. A decrease of 1% in interest rates would decrease our annual interest cost by $6.3 million regardless of the interest rate floor that exists on the Term Loan Facility. As our interest rate hedge expired on March 29, 2018, there are no hedges in place that would impact or offset the interest expense due to rate sensitivity.

Foreign Currency Exchange Rate Market Risk

We are exposed to market risks relating to fluctuations in foreign exchange rates between the U.S. dollar and other foreign currencies, primarily the Mexican Peso. Our exposure to foreign currency risk is limited to our operations in Mexico and the equity earnings of our joint venture. Such exposure, as of October 7, 2018, is primarily related to our $16.7 million equity investment in the Mexico joint venture. The remainder of our business is conducted in U.S. dollars and thus is not exposed to fluctuation in foreign currency. We do not hedge our foreign currency exposure and therefore are not exposed to such hedging risk.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a- 15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in the reports that we file or submit under the Exchange Act has been appropriately recorded, processed, summarized and reported on a timely basis and are effective in ensuring that such information is accumulated and communicated to the Company’s management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our CEO and CFO have concluded that, as of ~~October~~March 724, ~~2018~~2019, our disclosure controls and procedures are effective.

Changes in Internal Control Over Financial Reporting

During our quarter ended ~~October~~March 724, ~~2018~~2019, we implemented ancontrols ~~enterprise resource planning (ERP) software program, SAP,~~ to ~~replace~~ensure ~~our~~we ~~prior~~adequately ~~ERP~~evaluated ~~system.~~lease Incontracts ~~conjunction~~and ~~with~~properly assessed the ~~implementation~~impact of ~~SAP, we modified~~ the ~~design,~~new ~~operation~~lease ~~and~~accounting ~~documentation~~standard ofon ~~certain~~our ~~internal controls over~~ financial ~~reporting.~~statements ~~There~~to ~~have~~facilitate ~~been~~adoption noof ~~other~~the ~~changes~~standard inon ~~our internal control over financial reporting (as defined in Rules~~December ~~13a-15(f) under~~31, ~~the~~2018. ~~Exchange~~We ~~Act)~~implemented ~~during~~new ~~the~~lease ~~period~~administration ~~covered~~software byto ~~this~~support ~~Quarterly~~our ~~Report~~accounting onfor ~~Form 10-Q~~leases ~~that~~and have ~~materially~~integrated ~~affected, or are reasonably likely to materially affect,~~ the ~~Company’s~~new ~~internal~~software ~~control~~with ~~over~~our ~~financial~~processes ~~reporting~~and controls.

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There have been no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II - OTHER INFORMATION

Item 1. Legal Proceedings.

We are engaged in various legal actions, claims and proceedings in the ordinary course of business, including claims related to employment related matters, breach of contracts, products liabilities and intellectual property matters resulting from our business activities. We do not believe that the ultimate resolution of these pending claims will have a material adverse effect on our business, financial condition, results of operations or cash flows. However, litigation is subject to many uncertainties, and the outcome of certain individual litigated matters may not be reasonably predictable and any related damages may not be estimable. Some litigation matters could result in an adverse outcome to usthe Company, and any such adverse outcome could have a material adverse effect on ~~our~~its business, financial condition, results of operations or cash flows.

Item 1A. Risk Factors.

For a discussion of our potential risks and uncertainties, see the information in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K, for the year ended December 3130, ~~2017~~2018 filed with the SEC on March 1615, ~~2018~~2019. ~~There~~You ~~have~~should ~~been~~also noconsider ~~material~~carefully ~~changes~~the risks and uncertainties described below before making a decision to buy our common stock. If any of the ~~risk~~following ~~factors~~risks ~~disclosed~~actually occur, our business, financial condition, results of operations or growth prospects could be harmed. In that case, the trading price of our common stock could decline and you could lose all or part of your investment in our ~~Annual~~common ~~Report~~stock. onThe ~~Form 10-K~~risks described below are not the only risks facing us. Risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, operating results, and growth prospects.

Risks Related to the Offer

Because the Offer has not yet launched or closed, we cannot be sure that the transactions contemplated by the Merger Agreement will be consummated, which could have a negative effect on our financial performance and stock price.

As soon as practicable following Purchaser’s acceptance of Common Stock tendered pursuant to the Offer and upon the terms and subject to the conditions set forth in the Merger Agreement and in accordance with Section 251(h) of the Delaware General Corporation Law, the Merger will occur pursuant to which Purchaser will merge with and into the Company, whereupon the separate existence of Purchaser shall cease and the Company shall be the surviving corporation, without a meeting or vote of stockholders of the Company. At the Effective Time, the shares of Common Stock not purchased pursuant to the Offer (other than shares of Common Stock owned by the Company as treasury stock, by Parent or Purchaser or by stockholders of the Company who have perfected their statutory rights of appraisal under Delaware General Corporate Law) will each be converted into the right to receive an amount equal to the Offer Price.

The current market price of our Common Stock may reflect, among other things, the announcement and anticipated completion of the Offer and the Merger. The price of our Common Stock could decline if the Offer or the Merger are not consummated. The obligation of Purchaser to purchase shares of Common Stock tendered in the Offer is subject to the satisfaction or waiver of a number of conditions set forth in the Merger Agreement, including but not limited to: (i) prior to the expiration of the Offer, there shall have been validly tendered and not validly withdrawn shares of Common Stock that, together with all other shares of Common Stock, if any, owned by Purchaser and its affiliates (as defined in Section 251(h) of the Delaware General Corporation Law), represent at least one share of Common Stock more than 50% of the total number of outstanding shares of Common Stock at the time of the expiration of the Offer, (ii) the satisfaction of the Regulatory Condition, (iii) the completion of a specified marketing period for the debt financing, and (iv) each of the other conditions set forth in Annex I to the Merger Agreement. If the conditions set forth in the Merger Agreement are not met or waived, the Offer may not close nor will the Merger be consummated. We cannot ensure that each of the conditions to the consummation of the Offer will be satisfied.

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We may also be subject to additional risks, whether or not the Offer or the Merger is completed, including:

· our management having spent a significant amount of their time on and directed a significant portion of their efforts toward the Merger Agreement and the Offer, which time and efforts otherwise would have been spent on our business and other opportunities that could have been beneficial to us;

· costs relating to the Merger Agreement and the Offer, such as legal, financial, and accounting fees, much of which must be paid regardless of whether the Offer and the Merger are completed; and

· uncertainties relating to the Offer and the Merger may adversely affect our relationships with our employees, suppliers, customers, and other key constituencies.

Investors should not place undue reliance on the consummation of the Offer and the Merger. The realization of any of these risks may materially adversely affect our business, financial condition, results of operations and the market price of our Common Stock. The historical share prices of our Common Stock have experienced significant volatility. We cannot predict or give any assurances as to the market price of our Common Stock at any time before or after the completion of the Offer and the Merger.

If the Offer or the Merger are not consummated, we would expect to suffer a number of consequences that may adversely affect our business, results of operations and stock price, including, but not limited to, the following effects:

· the market price of our Common Stock would likely decrease since the current market price may reflect a market assumption that the Offer and the Merger will be consummated;

· in certain circumstances, we may be required to pay Parent a termination fee of $15,000,000;

· we may experience difficulties in attracting customers or obtaining financing due to changed perceptions about our competitive position, our management, our liquidity or other aspects of our business;

· we may be unable to find a partner willing to engage in a similar transaction on terms as favorable as those set forth in our agreements with Purchaser and Parent;

· we would not benefit from the anticipated benefits of the Offer and the Merger; and

· failure to complete the contemplated transactions may substantially limit our ability to grow and implement our current business strategies.

As a result of the contemplated Offer and Merger, our Common Stock has been trading within a narrow price range, which could limit possible returns on any new investment in our Common Stock.

Beginning with the first trading date following the announcement of the Merger Agreement, the contemplated Offer and the Merger, April 17, 2019, and continuing through the date hereof, our Common Stock has traded within a narrow price range: from a low closing price of $6.49 to a high closing price of $6.53. This constricted trading range surrounding the Offer price is typical with respect to proposed transactions such as the Offer, where the trading market may perceive that both the risk of one or more competing tender offers to be low and the likelihood of legal or regulatory impediments to the transaction to also be low. We expect that this narrow trading range is likely to continue until the closing of the Offer. Such a narrow trading range would very likely limit the returns, if any, on any investment in our Common Stock until the closing or abandonment of the Offer and the Merger.

The termination fee and restrictions on solicitation contained in the Merger Agreement may discourage other companies from trying to make a competing proposal.

Pursuant to the Merger Agreement, we have agreed not to solicit or initiate discussions with third parties regarding other acquisition proposals regarding us and have agreed to certain restrictions on our ability to respond to such proposals, as specified in the Merger Agreement. The Company will be required to pay Parent a cash termination fee equal to $15,000,000 if, among other reasons, the Merger Agreement is terminated (i) by the Company to enter into an acquisition agreement that constitutes a Superior Offer or (ii) by Parent because the Board of Directors of the Company (x) adversely changes its recommendation to stockholders to accept the Offer and tender their shares of Company Common Stock to Purchaser in the Offer, (y) fails to reject any tender offer or exchange offer by another party within 10 business days following commencement or such offer or (z) (1) the Merger Agreement is terminated by either the Company or Parent because the closing of the Offer has not occurred prior to the End Date or by Parent due to a material breach by the Company, (2) a third party acquisition proposal is publicly disclosed prior to such termination and (3) within 12 months following such termination, the Company consummates a third party acquisition proposal or enters into an agreement for a third party acquisition proposal which is subsequently completed. These provisions could discourage other companies from trying to make a competing proposal even though those other companies might be willing to offer greater value to our stockholders than Purchaser has offered.

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The Offer and Merger may adversely affect our relationship with our customers, suppliers and partners, and adversely affect our ability to attract and retain key employees.

The Offer will be completed and the Merger consummated only if stated conditions are met; accordingly, there may be uncertainty regarding the completion of the Offer and the consummation of the Merger. This uncertainty may cause customers, suppliers and partners to delay or defer decisions concerning certain of our products, which could negatively affect our business. Customers, suppliers, lenders and partners may also seek to change existing agreements with us as a result of the proposed Offer and Merger. Any delay or deferral of those decisions or changes in existing agreements could materially impact our business, regardless of whether the Offer and Merger are ultimately completed. The completion of the Offer and the consummation of the Merger may adversely affect our relationship with our customers, suppliers, lenders and partners. Similarly, current and prospective employees may experience uncertainty about their future roles with the Company. This may adversely affect our ability to attract and retain key management, technical, sales, marketing, and operations personnel.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit
No.		Description
3.1		Second Amended and Restated Certificate of Incorporation of Smart & Final Stores, Inc. (1)
2.1		Agreement and Plan of Merger, dated as of April 16, 2019, by and among Smart & Final Stores, Inc., First Street Parent, Inc., and First Street Merger Sub, Inc. (1)
3.2		Second Amended and Restated Bylaws of Smart & Final Stores, Inc. (1)
3.1		Second Amended and Restated Certificate of Incorporation of Smart & Final Stores, Inc. (2)
3.2		Second Amended and Restated Bylaws of Smart & Final Stores, Inc. (2)
31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1		Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS		XBRL Instance Document*
101.SCH		XBRL Taxonomy Extension Schema Document*
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB		XBRL Taxonomy Extension Label Linkbase Document*
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

* Filed herewith

(1) Filed as an exhibit to ~~Amendment No. 5 to the Registrant’s Registration Statement on~~ Form S8-1K ~~(File No. 333-196931)~~ filed with the SEC on ~~September~~April 2218, ~~2014~~2019, and incorporated herein by reference.

40(2) Filed as an exhibit to Amendment No. 5 to the Registrant’s Registration Statement on Form S-1 (File No. 333-196931) filed with the SEC on September 22, 2014, and incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the persons undersigned thereunto duly authorized.

	SMART & FINAL STORES, INC.
	(Registrant)
November 14, 2018	/s/ DAVID G. HIRZ
May 2, 2019	/s/ DAVID G. HIRZ
	David G. Hirz
	Chief Executive Officer
	(Principal Executive Officer)
November 14, 2018	/s/ RICHARD N. PHEGLEY
May 2, 2019	/s/ RICHARD N. PHEGLEY
	Richard N. Phegley
	Chief Financial Officer
	(Principal Financial Officer)

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Filing Compare · Smart & Final Stores, Inc.