United Natural Foods, Inc. — Fiscal 2021 Second-Quarter Form 10-Q
Business context and reporting period
UNFI distributes natural, organic, specialty, produce and conventional grocery and non-food products, primarily in the United States and Canada, and provides support services to retailers. The filing covers the 13-week quarter and 26-week year-to-date period ended January 30, 2021, compared with periods ended February 1, 2020. Reportable segments are Wholesale and Retail, with additional activities classified as Other.
Retail operations that no longer met the held-for-sale criteria were reclassified from discontinued operations to continuing operations, and prior periods were conformed. Four Shoppers locations remained in discontinued operations at quarter-end.
Financial performance and key metrics
| Metric | Q2 FY2021 | Q2 FY2020 | 26 weeks FY2021 | 26 weeks FY2020 |
|---|---|---|---|---|
| Net sales | $6.888 billion | $6.431 billion | $13.561 billion | $12.728 billion |
| Gross profit | $990.4 million | $917.3 million | $1.957 billion | $1.825 billion |
| Gross margin | 14.38% | 14.26% | 14.43% | 14.33% |
| Operating income (loss) | $105.3 million | $17.5 million | $154.6 million | $(398.9) million |
| Net income attributable to UNFI | $59.0 million | $(30.7) million | $57.9 million | $(414.6) million |
| Diluted EPS | $1.00 | $(0.57) | $0.98 | $(7.77) |
| Adjusted EBITDA | $206.3 million | $131.1 million | $365.3 million | $252.8 million |
Q2 sales increased 7.1%, while year-to-date sales increased 6.5%. Q2 operating income margin improved to approximately 1.53% from 0.27%; year-to-date operating income margin was approximately 1.14% versus negative 3.13% in the prior year. Q2 net margin was approximately 0.86%, compared with negative 0.48%.
- Wholesale Q2 sales increased to $6.609 billion from $6.207 billion, and segment Adjusted EBITDA increased 82.3% to $186.8 million.
- Retail Q2 sales increased 15.3% on an identical-store basis to $620.9 million; Retail Adjusted EBITDA increased 121.6% to $25.3 million.
- Higher pandemic-related food-at-home demand, cross-selling, operating leverage and lower bad-debt expense supported results. Foodservice sales declined 41%, or $42 million, in Q2.
- Q2 operating expenses rose only 0.5% and declined to 12.59% of sales from 13.41%. Prior-year expenses included approximately $28.9 million of bad-debt expense related to customer bankruptcies.
Cash flow, debt and liquidity
- Operating cash flow was $207.0 million for the 26 weeks, including $205.7 million from continuing operations, versus $39.1 million and $34.7 million, respectively, in the prior-year period.
- Capital expenditures were $91.5 million versus $91.1 million. Investing cash flow was an outflow of $50.2 million, aided by $39.9 million of asset-disposition proceeds.
- Cash and cash equivalents were $40.5 million at January 30, 2021, down from $47.0 million at August 1, 2020.
- Total debt was $2.387 billion, down from $2.498 billion. The company had $1.118 billion of unused ABL capacity and reported total liquidity of approximately $1.16 billion.
- The ABL facility had $885.0 million drawn, $95.8 million of letters of credit and approximately $1.118 billion of remaining availability. The company was not subject to the ABL fixed-charge coverage covenant through the filing date.
- UNFI issued $500.0 million of 6.750% senior notes due October 2028 and used proceeds, together with ABL borrowings, to repay term debt. It also made $758.0 million of term-loan prepayments year-to-date, including a $150.0 million voluntary repayment in Q2.
Material changes versus the prior comparable period
- Profitability improved substantially as higher sales and gross profit exceeded operating-cost growth; prior-year results were burdened by a $425.4 million goodwill and asset impairment charge.
- Restructuring, acquisition and integration expense declined to $17.8 million in Q2 from $36.5 million and to $34.2 million year-to-date from $51.2 million.
- Interest expense increased to $50.9 million in Q2 from $48.8 million and to $120.1 million year-to-date from $98.5 million, partly because of $5.7 million of Q2 debt-extinguishment costs and $29.5 million year-to-date.
- The company adopted the expected-credit-loss standard in fiscal 2021 with a $9.2 million reduction to opening retained earnings; management said the overall financial-statement impact was not material.
- Interest-rate swaps covered $1.485 billion of floating-rate notional debt at quarter-end. The related net liability was approximately $101.2 million.
Guidance, outlook, commentary and risks
- No full-year revenue or earnings guidance is provided in the filing text. Management expects fiscal 2021 capital expenditures of $250 million to $300 million and longer-term capital spending at or below 1% of net sales.
- Management expects elevated food-at-home demand and related sales and margin benefits to continue while pandemic-driven behavior remains elevated, but noted that benefits have moderated and the duration and severity of COVID-19 remain uncertain.
- UNFI expects to fund near-term debt maturities through fiscal 2023 with internally generated cash, asset-sale proceeds or ABL borrowings. Fiscal 2021 other debt maturities were expected to be $6.5 million, excluding finance-lease obligations.
- The company expects additional advisory, integration and distribution-center costs during fiscal 2021. It also plans to divest Retail over time and may incur material severance, store-closure, multiemployer-pension and other restructuring costs.
- The Whole Foods distribution agreement was extended after quarter-end from September 2025 to September 2027, satisfying a term-loan maturity condition. The term-loan amendment reduced applicable margins by 75 basis points.
- Principal risks include COVID-19 effects, dependence on significant customers, low industry margins, competition, customer credit losses, supply-chain and technology execution, labor and multiemployer-pension obligations, fuel and foreign-exchange volatility, impairment charges and retail-divestiture costs.
- UNFI disclosed approximately $305 million of non-cancelable purchase obligations and guarantees with a maximum undiscounted payment exposure of $28.7 million. It had not recorded material accruals for disclosed legal proceedings, including opioid-related litigation and prescription-pricing claims.
- The CEO transition remains active. The CEO’s service period was extended no later than October 31, 2021, and the company entered into a $675,000 retention agreement with its president, subject to continued service through February 1, 2022 or earlier qualifying termination.
Important facts for investors to verify
- Whether pandemic-related volume, food-at-home demand and margin benefits persist or reverse as consumer behavior normalizes.
- Actual free cash flow after capital expenditures, debt prepayments and working-capital requirements.
- Debt refinancing needs, ABL borrowing-base availability, interest-rate exposure and compliance with debt covenants.
- The timing, proceeds and stranded costs associated with planned Retail divestitures and distribution-network optimization.
- Future restructuring, impairment, multiemployer-pension and legal liabilities, including exposures that are currently difficult to estimate.
- Execution of the Whole Foods and Key Food relationships, including expected sales, customer concentration and supply-chain capacity.
- The effect of CEO succession and related retention and compensation arrangements on operating continuity and expenses.