United Natural Foods, Inc. — Fiscal 2015 First-Quarter 10-Q
Reporting period: Three months ended November 1, 2014, compared with November 2, 2013. UNFI distributes natural, organic and specialty products in the United States and Canada; its wholesale business is the only reportable segment. The statements are unaudited.
Financial performance and position
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales | $1.992 billion | $1.602 billion | +24.4% |
| Gross profit | $319.0 million | $271.2 million | +17.6% |
| Gross margin | 16.0% | 16.9% | Down 90 basis points |
| Operating income | $58.4 million | $48.0 million | +21.6% |
| Operating margin | 2.9% | 3.0% | Down 10 basis points |
| Net income | $33.0 million | $27.8 million | +19.0% |
| Diluted EPS | $0.66 | $0.56 | +$0.10 |
| Net cash used in operations | $98.7 million | $49.7 million | Use increased by $49.1 million |
| Capital expenditures | $27.4 million | $33.2 million | Down $5.9 million |
The effective tax rate was 39.5%, compared with 40.0% in the prior-year quarter. Other expense, net increased to $3.8 million from $1.8 million, principally because interest expense rose to $3.3 million from $1.9 million.
At November 1, 2014, cash and cash equivalents were $17.6 million. Working capital was $960.9 million. Total debt included $10.97 million of current long-term debt, $366.8 million of notes payable, and $169.8 million of long-term debt excluding the current portion. The company reported $358.0 million drawn under its revolving credit facility, $41.8 million of letters of credit and reserves, and $188.3 million of remaining availability.
Material changes versus the prior comparable period
- Sales growth was driven primarily by the inclusion of $214.8 million of Tony’s Fine Foods sales following its July 2014 acquisition, organic wholesale growth, and approximately 1.9% food-price inflation.
- Tony’s contributed to lower gross margins, along with customer-mix changes, higher inbound freight costs, and the weaker Canadian dollar. Sales growth in lower-margin supernatural and conventional supermarket channels also diluted gross margin.
- Operating expenses increased 16.8% to $260.6 million, but declined to 13.1% of sales from 13.9% because of scale and the channel mix.
- Operating expenses included approximately $1.4 million of facility-startup costs, $0.6 million for a Canadian intangible-asset write-off, and $0.3 million of remaining Tony’s acquisition costs. Restructuring and asset impairment expenses totaled $0.6 million.
- Operating cash flow was negative because inventories increased by $150.8 million and accounts receivable increased by $42.1 million, partly offset by a $50.9 million increase in accounts payable.
- The company entered into a $150.0 million real-estate-backed term loan in August 2014. Proceeds were used to reduce revolver borrowings; $147.5 million remained outstanding under the term loan at quarter-end, with quarterly principal payments of $2.5 million beginning November 1, 2014.
- Whole Foods Market represented approximately 33% of current-quarter sales, down from approximately 36% in the prior-year quarter, although dollar sales increased approximately 16%.
Guidance, outlook, risks and unusual items
- Management expected fiscal 2015 sales to exceed the comparable fiscal 2014 periods, driven largely by incremental Tony’s sales, organic growth, new customers and expanded product sales to existing customers.
- Management expected supernatural and conventional supermarket growth to outpace other channels, while acknowledging that these channels generally generate lower gross margins.
- The company expected to offset margin pressure through supply-chain efficiencies and continued rollout of its warehouse management and supply-chain platform, targeted for completion across existing facilities by the end of fiscal 2017.
- Management projected average annual operating cash flow of $75 million to $125 million for fiscal 2015 and fiscal 2016 and planned fiscal 2015 capital expenditures of approximately 2.0% to 2.2% of sales, excluding potential sale-leaseback transactions.
- Key risks include customer concentration, relatively low margins, economic and consumer-spending sensitivity, food-price and fuel volatility, supply-chain disruptions, labor issues, acquisition integration, execution of the Tony’s strategy, and deployment of warehouse and transportation-management systems.
- The company had fixed-price commitments to purchase approximately 0.5 million gallons of diesel fuel at $3.13 to $3.92 per gallon through December 2015.
- Management stated that pending litigation was routine and not expected to have a material adverse effect, and that there were no material changes to previously disclosed risk factors.
Investor verification points
- Verify whether Tony’s revenue growth and integration benefits offset its lower-margin mix and acquisition-related costs.
- Monitor gross margin, particularly in the Whole Foods and conventional supermarket channels.
- Assess inventory and receivables growth, negative operating cash flow, and the company’s ability to convert earnings into cash.
- Review revolver availability, term-loan covenants, leverage, required amortization, and interest-rate exposure.
- Track execution and costs for new distribution centers and the warehouse-management-system rollout.
- Evaluate dependence on Whole Foods Market, which accounted for approximately one-third of quarterly sales.