United Natural Foods, Inc. — Fiscal 2022 First-Quarter 10-Q
Business context and reporting period
UNFI distributes natural, organic, specialty, produce and conventional grocery and non-food products and provides support services to retailers in the United States and Canada. The filing covers the 13-week period ended October 30, 2021, compared with the 13-week period ended October 31, 2020. Reportable segments are Wholesale and Retail.
Key financial metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $6,997 million | $6,684 million | 4.7% increase |
| Gross profit | $1,042 million | $970 million | 7.4% increase |
| Gross margin | 14.89% | 14.51% | 38 basis-point increase |
| Operating income | $107 million | $50 million | $57 million increase |
| Net income attributable to UNFI | $76 million | $(1) million | $77 million increase |
| Diluted earnings per share | $1.25 | $(0.02) | $1.27 increase |
| Adjusted EBITDA | $189 million | $159 million | $30 million increase |
| Net cash used in operating activities | $(81) million | $(58) million | $23 million higher use |
| Capital expenditures | $56 million | $41 million | $15 million increase |
Operating margin was approximately 1.5%, net margin was approximately 1.1%, and Adjusted EBITDA margin was approximately 2.7%. The effective tax rate was a 1.3% benefit, primarily from discrete benefits related to employee stock award vestings and the release of uncertain tax positions.
Wholesale sales increased to $6,734 million from $6,438 million, while Retail sales declined slightly to $602 million from $606 million. Wholesale Adjusted EBITDA increased to $164 million from $123 million; Retail Adjusted EBITDA declined to $22 million from $25 million.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $46 million at October 30, 2021, compared with $41 million at July 31, 2021.
- Total liquidity was $1,112 million, consisting of $46 million of cash and $1,066 million of unused ABL credit availability.
- Total debt, including the current portion, was $2,390 million, up from $2,188 million at July 31, 2021, primarily because of seasonal working-capital borrowing under the ABL facility.
- Working capital increased to $1,328 million from $1,063 million, driven by higher inventory and accounts receivable balances.
- The ABL Credit Facility had $2,094 million of total availability, $910 million of borrowings and $118 million of letters of credit outstanding at quarter-end.
- UNFI was in compliance with its debt covenants and had not been subject to the ABL fixed-charge coverage covenant through the filing date.
Material changes versus the prior comparable period
- Sales growth was driven by inflation, new and expanded customer relationships, cross-selling and growth in the Supernatural and Independent retailer channels. Supply-chain challenges and modest market contraction partially offset growth.
- Management estimated aggregate cost inflation of approximately 4% during the quarter.
- Gross margin expanded, primarily from Wholesale margin improvement and the ValuePath initiative. Operating expenses grew more slowly than sales, although transportation, labor and distribution-center costs increased.
- Restructuring, acquisition and integration expense declined to $3 million from $16 million.
- Interest expense declined to $40 million from $69 million, largely because the prior-year period included $24 million of debt-extinguishment costs and the company had lower interest expense on debt.
- Operating cash flow deteriorated because of seasonal inventory and receivable investment, while financing cash flow increased as the company used ABL borrowings to fund working capital and capital expenditures.
Guidance, outlook, commentary and risks
- Management expects fiscal 2022 capital expenditures of approximately $300 million, plus approximately $152 million to acquire the Riverside, California distribution-center property. The Riverside acquisition is expected to be funded through a concurrent sale-leaseback.
- UNFI expects to incur start-up costs and operating losses as its Allentown, Pennsylvania distribution center ramps toward full capacity.
- Management intends to use free cash flow to reduce debt and improve leverage. It does not expect to repurchase shares under the authorized program during fiscal 2022 and does not pay a dividend.
- After quarter-end, UNFI prepaid $150 million of term debt using additional ABL borrowings and amended the Term Loan Agreement to reduce applicable interest-rate margins by 25 basis points. A $5 million debt-extinguishment loss is expected in the second quarter.
- Key risks include COVID-19 developments, labor and driver shortages, wage and third-party labor costs, supply-chain disruption, inflation and fuel-price volatility, customer concentration, competitive pressure, technology implementation, potential asset impairments and the low-margin nature of food distribution.
- UNFI had approximately $243 million of non-cancelable future purchase obligations, mostly payable and utilized within one year. Guarantees had a maximum undiscounted exposure of $27 million, with $1 million accrued.
- UNFI remained involved in opioid-related litigation, prescription-price litigation and a False Claims Act matter. The Seventh Circuit denied rehearing in the False Claims Act case on December 3, 2021. No material legal accrual had been recorded, but management cautioned that outcomes could materially affect financial condition, results or cash flows.
Most important facts for investors to verify
- Whether Wholesale margin expansion and the ValuePath savings are sustainable after inflation and customer pricing effects normalize.
- Whether labor shortages, transportation costs and supply-chain disruption pressure operating expenses and service levels.
- Progress and profitability of the Allentown distribution center and the timing, funding and accounting effects of the Riverside sale-leaseback.
- Debt reduction progress, ABL availability, floating-rate exposure and the effect of the $150 million post-quarter-end term-loan prepayment.
- Operating cash-flow conversion, particularly inventory and receivable growth relative to sales.
- Developments in opioid, prescription-pricing, False Claims Act and other contingent litigation matters.