United Natural Foods, Inc. — FY2013 Form 10-K Summary
Business context and reporting period
United Natural Foods, Inc. distributes natural, organic and specialty food and non-food products in the United States and Canada, with additional retail, manufacturing and branded-product operations. The fiscal year ended August 3, 2013 contained 53 weeks; the fourth quarter contained 14 weeks. The prior fiscal year ended July 28, 2012 and contained 52 weeks.
At year-end, the Company operated 27 distribution centers totaling approximately 6.5 million square feet and served more than 31,000 customer locations. Whole Foods Market accounted for approximately 36% of fiscal 2013 net sales.
Key financial metrics
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net sales | $6.064 billion | $5.236 billion | +15.8% |
| Gross profit | $1.025 billion | $916.0 million | +11.9% |
| Gross margin | 16.9% | 17.5% | Down 60 bps |
| Operating income | $185.5 million | $155.2 million | +19.6% |
| Operating margin | 3.1% | 3.0% | Up 10 bps |
| Net income | $107.9 million | $91.3 million | +18.1% |
| Diluted EPS | $2.18 | $1.86 | +17.2% |
| Cash flow from operations | $44.3 million | $66.2 million | Down $21.9 million |
| Capital expenditures | $66.6 million | $31.5 million | +111.3% |
Fourth-quarter net sales were $1.642 billion versus $1.344 billion in the prior-year quarter. Fourth-quarter gross profit was $284.5 million, income before taxes was $53.3 million, net income was $32.1 million and diluted EPS was $0.65, compared with $25.1 million and $0.51, respectively, in the prior-year quarter.
Fiscal 2013 year-end cash and cash equivalents were $11.1 million. Working capital was $717.0 million, inventories were $702.2 million and accounts receivable were $339.6 million. Total assets were $1.730 billion and stockholders’ equity was $1.099 billion.
The Company had $130.6 million outstanding under its secured revolving credit facility, $31.8 million of letters of credit and $319.3 million of remaining availability at August 3, 2013. The facility has aggregate commitments of $500 million and matures May 24, 2017. Long-term debt, including current maturities, was $34.1 million, primarily a financing obligation related to the Aurora, Colorado distribution center.
Material changes versus the prior comparable period
- Sales growth was driven by organic growth of approximately 14.8%, moderate price inflation of approximately 2%, the additional fiscal week, and $53.8 million of incremental sales from three first-quarter acquisitions.
- Conventional supermarket sales increased approximately 20.5% and represented 25% of sales, compared with 24% in fiscal 2012. Sales to Whole Foods Market increased approximately 17.2% while remaining approximately 36% of total sales.
- The sales mix shifted further toward conventional supermarkets and supernatural chains, which generally produce lower gross margins. Approximately 61% of fiscal 2013 sales came from these channels versus approximately 60% in fiscal 2012.
- Gross margin declined because of channel mix, higher inbound freight, increased private-label sales, supplier out-of-stocks and expedited or inter-facility freight incurred to maintain service levels.
- Operating expenses declined to 13.8% of sales from 14.5%, benefiting from expense controls, fixed-cost leverage and the generally lower cost to serve larger chain customers.
- Fiscal 2013 included approximately $6.3 million of labor-action costs at the Auburn, Washington facility, a $1.6 million intangible-asset impairment, and a $4.9 million pre-tax charge to settle a multi-state unclaimed-property audit.
- Operating cash flow declined primarily because inventories increased $123.9 million and accounts receivable increased $37.3 million. Days inventory increased to 52 from 50, while days sales outstanding improved to 21 from 22.
- The Company completed three distribution-related acquisitions for approximately $9.2 million of total consideration and opened or consolidated facilities in Logan Township, New Jersey and Aurora, Colorado.
Guidance, outlook, commentary and risks
Management expected fiscal 2014 net sales to grow over fiscal 2013, supported by new customers, expanded product penetration, continued growth in conventional supermarkets and supernatural chains, and food-price inflation similar to fiscal 2013. Management expected most growth to come from lower-margin channels.
The Company expected fiscal 2014 operating cash flow of approximately $50 million to $100 million for each of fiscal 2014 and fiscal 2015, capital expenditures of approximately $80 million to $95 million in fiscal 2014, and capital expenditures of approximately 1.4% of fiscal 2014 net sales. Planned spending included new distribution centers in Wisconsin and New York and continued technology deployment.
The national warehouse-management and procurement platform was expected to be rolled out across existing facilities by the end of fiscal 2017. Management stated that the system should improve efficiency, but disclosed risks relating to implementation delays, cost overruns, start-up inefficiencies and failure to achieve anticipated savings.
- Customer concentration is significant: Whole Foods Market represented approximately 36% of sales, creating exposure to customer growth, self-distribution, store closures or contract changes. The distribution agreement runs through September 25, 2020.
- The business operates at low margins and faces pricing pressure, retailer consolidation, supplier out-of-stocks, food-cost volatility, inflation or deflation, fuel costs and competitive threats.
- Supply-chain disruptions, extreme weather, crop conditions, product recalls, transportation interruptions, labor actions and natural disasters could affect product availability and operating costs.
- The Company is primarily self-insured for workers’ compensation and automobile liability; reserves may be insufficient if claims exceed estimates.
- Debt agreements contain collateral requirements, financial covenants and restrictions on additional debt, liens, investments and dividends. The Company paid no cash dividends and had no current intention to do so.
- Contractual obligations totaled approximately $531.1 million, including $327.6 million of operating leases, $130.6 million of revolving-credit obligations, $34.1 million of long-term debt and $26.5 million of inventory purchase commitments.
- Subsequent to year-end, the Company agreed to acquire Trudeau Foods, a Minnesota-based natural, organic and specialty-food distributor serving more than 600 customer locations.
Important facts for investors to verify
- Reconcile the 53-week fiscal calendar and 14-week fourth quarter when comparing quarterly growth rates.
- Assess whether continued sales growth in lower-margin chain channels can offset gross-margin pressure.
- Monitor Whole Foods Market concentration and the terms and performance of the distribution agreement through 2020.
- Verify inventory growth, working-capital requirements and the conversion of net income into operating cash flow.
- Evaluate the return on new distribution centers, technology investments and fiscal 2014 capital expenditures.
- Review revolving-credit availability, borrowing-base calculations, covenant triggers and variable-rate exposure.
- Follow the integration, purchase accounting and financing implications of the Trudeau Foods acquisition.