UNITED NATURAL FOODS INC annual report, FY2023

United Natural Foods, Inc. Fiscal 2023 Form 10-K Summary

Business context and reporting period

UNFI is a grocery and non-food distributor serving more than 30,000 customer locations across the United States and Canada. It operates through Wholesale and Retail reportable segments, plus manufacturing and branded-product businesses. The filing covers the 52-week fiscal year ended July 29, 2023; the requested “2023 Q4” is therefore addressed through the annual filing rather than a standalone quarterly report.

UNFI operated 55 distribution centers and warehouses totaling approximately 30.1 million square feet and 78 company-operated grocery stores. Whole Foods Market represented approximately 21% of fiscal 2023 net sales under a distribution agreement extending through September 27, 2027.

Financial performance and key metrics

Metric	Fiscal 2023	Fiscal 2022	Change
Net sales	$30.272 billion	$28.928 billion	4.6% increase
Gross profit	$4.131 billion	$4.182 billion	1.2% decrease
Gross margin	13.6%	14.5%	Down 90 basis points
Operating income	$120 million	$423 million	Decrease of $303 million
Net income attributable to UNFI	$24 million	$248 million	Decrease of $224 million
Diluted EPS	$0.40	$4.07	Decrease of $3.67
Adjusted EBITDA	$640 million	$829 million	22.8% decrease
Cash flow from operating activities	$624 million	$331 million	Increase of $293 million
Capital expenditures	$323 million	$251 million	Increase of $72 million

Net sales growth was primarily attributable to inflation, new customers and expanded categories, partly offset by lower unit volumes. Wholesale sales increased 4.7% to $29.142 billion, while Retail sales increased 0.5% to $2.480 billion; Retail identical-store sales declined 0.9%.

Gross margin weakened because of lower procurement gains as inflation decelerated, higher shrink expense and customer mix. The non-cash LIFO charge was $119 million in fiscal 2023 versus $158 million in fiscal 2022; excluding LIFO, gross margin was 14.0% versus 15.0%.

Operating expenses increased 3.9% to $3.973 billion. Lower incentive compensation expense partially offset higher occupancy and other operating costs. Adjusted EBITDA declined in both Wholesale, to $540 million from $696 million, and Retail, to $70 million from $98 million.

Liquidity, debt and cash flow

Total liquidity was $1.517 billion at July 29, 2023, consisting of $37 million of cash and $1.480 billion of unused ABL credit capacity.
Total debt declined to $1.963 billion from $2.123 billion. Long-term debt included $670 million under the Term Loan Facility, $812 million under the ABL Credit Facility and $500 million of senior notes.
UNFI made $130 million of voluntary Term Loan prepayments and net ABL payments of $28 million during fiscal 2023.
Receivables monetization generated $287 million of net cash proceeds, including proceeds used for a $125 million Term Loan prepayment and ABL borrowings reduction. The receivables purchase facility was increased to $350 million.
Fiscal 2024 scheduled debt maturities are expected to be $8 million, and no excess-cash-flow prepayment was required based on the fiscal 2023 leverage ratio.
Fiscal 2024 capital expenditures are expected to be approximately $400 million, primarily for distribution-network automation, optimization and technology investments.
Interest expense was $144 million, compared with $155 million in fiscal 2022. An estimated 100-basis-point increase in variable borrowing rates would increase annual interest expense by approximately $7 million after hedging effects.

Material changes versus the prior comparable period

Revenue increased, but profitability deteriorated materially because gross margin contracted and operating expenses increased.
Operating income fell from $423 million to $120 million, while net income attributable to UNFI fell from $248 million to $24 million.
Fiscal 2023 included a $25 million intangible-asset impairment charge related to rationalization of the Blue Marble Brands portfolio and a $14 million loss on receivables sales. Fiscal 2022 benefited from an $87 million gain on sale of a distribution center.
UNFI realigned its Wholesale organization from four operating regions to three U.S. regions during June 2023.
Capital spending increased substantially because of supply-chain automation and technology projects.
Working capital declined by $322 million to $1.058 billion, primarily from receivables monetization and lower inventory.
UNFI repurchased approximately 1.888 million shares for $62 million under its $200 million authorization; $138 million remained available at year-end.
The effective tax rate was an unusual 328.6% benefit rate, driven by solar credits, previously unrecognized tax benefits and excess tax deductions related to share-based compensation. This benefit exceeded pretax income and is not indicative of the underlying operating tax rate.

Guidance, outlook, management commentary and risks

Management is pursuing a business-transformation strategy focused on network automation and optimization, commercial value creation, digital offerings, and infrastructure modernization. Near-term initiatives include administrative efficiencies, reduced selling and administrative spending, SKU optimization and review of commercial contracts.

Management expects to reinvest in the business while reducing financial leverage over the long term. The filing does not provide a full fiscal 2024 earnings or revenue outlook, but it forecasts approximately $400 million of fiscal 2024 capital expenditures and approximately $50 million of contributions to multiemployer pension plans.

Key operating risks include low grocery-industry margins, intense competition, inflation or deflation, fuel costs, labor shortages, union negotiations, supply-chain disruptions and changing consumer purchasing patterns.
Whole Foods Market concentration is material, and the customer accounted for approximately 21% of fiscal 2023 net sales.
Approximately 36% of employees were covered by 49 collective bargaining agreements. Fourteen agreements covering approximately 4,210 employees were scheduled to expire during fiscal 2024.
Multiemployer pension plans are generally underfunded. UNFI recognized $48 million of fiscal 2023 contributions and expects approximately $50 million of fiscal 2024 contributions. Future withdrawal liabilities could be material.
UNFI reported approximately $685 million of non-cancelable purchase obligations, primarily payable and used in the ordinary course within one year.
Guarantees supporting certain customer leases, fixture financing and other obligations had a maximum undiscounted exposure of $15 million; $1 million was accrued.
UNFI is involved in opioid-related litigation, prescription-pricing litigation and a False Claims Act matter remanded for further proceedings. No material accrual had been recorded as of July 29, 2023, but outcomes could materially affect results.
Transformation and automation initiatives may involve significant costs, execution challenges, system disruptions and delayed or unrealized benefits.

KPMG issued an unqualified opinion on the consolidated financial statements and concluded that internal control over financial reporting was effective as of July 29, 2023.

Most important facts for investors to verify

Whether margin pressure from lower procurement gains, shrink and customer mix persists as inflation moderates.
Progress toward the expected benefits of automation, technology modernization and the broader transformation program.
Whole Foods Market contract economics, purchase commitments and renewal or termination provisions through 2027.
Cash generation after approximately $400 million of planned fiscal 2024 capital expenditures and required debt service.
Refinancing and covenant risk associated with the $670 million Term Loan maturing in 2026 and the $812 million ABL balance maturing in 2027.
The sustainability of liquidity after receivables monetization and the effect of any reduction in borrowing-base availability.
Potential costs from multiemployer pension underfunding, union negotiations and future withdrawal liabilities.
Developments and possible exposure in the False Claims Act, prescription-pricing and opioid-related proceedings.
Underlying earnings excluding the unusual tax benefit, LIFO charge, intangible impairment, receivables-sale loss and other non-GAAP adjustments.