United Natural Foods, Inc. — Fiscal 2022 Form 10-K Summary
Business context and reporting period
UNFI is a grocery and non-food distributor serving more than 30,000 customer locations in the United States and Canada, with approximately 260,000 products, 56 distribution centers and 73 company-operated retail stores. Reportable segments are Wholesale and Retail, with additional manufacturing and branded-product activities in Other.
The filing covers the 52-week fiscal year ended July 30, 2022, compared with the 52-week fiscal year ended July 31, 2021. The company’s largest customer, Whole Foods Market, represented approximately 20% of fiscal 2022 net sales under a distribution agreement extending through September 27, 2027.
Key financial metrics
| Metric | Fiscal 2022 | Fiscal 2021 | Change |
|---|---|---|---|
| Net sales | $28.928 billion | $26.950 billion | Up 7.3% |
| Gross profit | $4.182 billion | $3.939 billion | Up 6.2% |
| Gross margin | 14.5% | 14.6% | Down 10 basis points |
| Operating income | $423 million | $294 million | Up $129 million |
| Net income attributable to UNFI | $248 million | $149 million | Up $99 million |
| Diluted EPS | $4.07 | $2.48 | Up $1.59 |
| Adjusted EBITDA | $829 million | $770 million | Up $59 million |
| Cash flow from operating activities | $331 million | $614 million | Down $283 million |
| Capital expenditures | $251 million | $310 million | Down $59 million |
| Total debt | $2.123 billion | $2.188 billion | Down $65 million |
Fiscal 2022 product-cost inflation was estimated at approximately 6%. Excluding the non-cash LIFO charge, gross margin was 15.0% versus 14.7% in fiscal 2021. The fiscal 2022 LIFO charge was $158 million, compared with $24 million in the prior year.
Wholesale sales increased to $27.824 billion from $25.873 billion, while Wholesale Adjusted EBITDA increased to $696 million from $677 million. Retail sales increased modestly to $2.468 billion, and Retail Adjusted EBITDA was unchanged at $98 million. Identical-store sales increased 0.9%.
Cash and cash equivalents were $44 million at year-end. Total liquidity was $1.671 billion, comprising $1.627 billion of unused ABL capacity and $44 million of cash. Working capital increased to $1.380 billion from $1.063 billion, primarily due to higher inventory and receivables associated with growth and inflation.
Material changes versus the prior comparable period
- Sales growth was driven primarily by inflation, new customer activity, cross-selling and higher sales to independent retailers and natural-product customers; supply-chain constraints and lower unit growth were offsets.
- Operating expenses rose 6.5% to $3.825 billion, reflecting higher transportation, distribution labor, occupancy and customer-service costs. The company continued to face labor shortages and increased reliance on third-party labor.
- Interest expense declined to $155 million from $204 million, primarily because of lower debt balances, lower swap-related interest costs and lower debt-extinguishment losses.
- The company recorded an $87 million gain on a Riverside, California distribution-center sale-leaseback. It acquired the property for approximately $153 million, sold it for $225 million and entered into a 15-year operating lease.
- Fiscal 2022 included an $8 million benefit from revising estimated multiemployer pension withdrawal liabilities, compared with a $63 million withdrawal charge in fiscal 2021.
- Operating cash flow declined substantially as inventory and receivables absorbed cash. Inventory increased to $2.355 billion from $2.247 billion, and accounts receivable increased to $1.214 billion from $1.103 billion.
- UNFI entered into a new $2.6 billion ABL facility maturing in 2027, replacing the prior $2.1 billion facility. It also made $202 million of voluntary term-loan prepayments during fiscal 2022.
Guidance, outlook, commentary and risks
Management expects to continue investing in the Fuel the Future strategy, including distribution automation, technology, supply-chain optimization and customer services, while reducing financial leverage. Fiscal 2023 capital expenditures are expected to be approximately $350 million. Management expects to fund debt maturities and capital expenditures through operating cash flow and ABL borrowings; scheduled fiscal 2023 debt maturities are expected to be $14 million, and no fiscal 2022 excess-cash-flow prepayment is required in fiscal 2023 based on the reported leverage ratio.
The new Allentown, Pennsylvania distribution center began operations in fiscal 2022 and incurred start-up costs and operating losses while volumes ramped. The company expects continued network realignment, expansion and improvement expenses.
- Principal customer concentration is significant: Whole Foods Market generated approximately 20% of fiscal 2022 sales. Loss of the relationship, reduced purchasing or self-distribution could materially affect results.
- The business operates at low margins and remains exposed to inflation, product-cost deflation, competitive pricing pressure, customer mix, fuel costs and labor inflation.
- Supply-chain disruptions, product shortages, transportation constraints, extreme weather, pandemics and supplier failures may reduce fill rates and increase operating costs.
- Approximately 10,900 employees, or 36% of the workforce, were covered by 48 collective bargaining agreements. Work stoppages, higher wage costs or additional multiemployer pension withdrawal liabilities remain potential risks.
- Debt agreements restrict dividends, share repurchases, additional indebtedness, asset transfers and other corporate actions. Total debt maturities excluding interest are $2.163 billion, including $800 million in fiscal 2026 and $840 million in fiscal 2027.
- Interest-rate exposure remains relevant despite swaps: a 100-basis-point increase in variable borrowing rates was estimated to increase annual interest expense by approximately $4 million after swaps.
- Multiemployer pension plans include plans classified as “Deep Red,” and accrued withdrawal liabilities totaled approximately $101 million at year-end. Fiscal 2023 contributions to multiemployer pension plans are expected to be approximately $51 million.
- Legal and regulatory exposures include opioid-related litigation, pharmacy-pricing claims, product liability, food safety, labor, environmental and other ordinary-course matters. No material accrued obligation was recorded for the disclosed legal proceedings.
The company reported no material impairment in fiscal 2022, maintained effective disclosure controls and internal control over financial reporting, and received an unqualified audit opinion from KPMG LLP.
Important facts for investors to verify
- Whether sales growth and gross-margin improvement excluding LIFO charges persist after inflation moderates and customer mix changes.
- Progress in ramping the Allentown facility and delivering expected savings from automation, warehouse-management and supply-chain technology initiatives.
- Working-capital conversion and whether operating cash flow recovers from the fiscal 2022 inventory and receivables build.
- Debt reduction, refinancing requirements around the $800 million term loan maturity in fiscal 2026 and the $840 million ABL balance maturing in fiscal 2027.
- Whole Foods Market purchasing trends and the company’s ability to diversify customer concentration.
- Future labor costs, collective bargaining outcomes and potential multiemployer pension withdrawal liabilities.
- The timing and limits of the new $200 million share-repurchase authorization approved in September 2022, including restrictions under the company’s debt agreements.
- Potential cash or earnings effects from disclosed litigation, guarantees, purchase commitments and other contingencies.