United Natural Foods, Inc. Form 10-Q Summary
Business context and reporting period
United Natural Foods, Inc. distributes natural, organic and specialty food and non-food products primarily in the United States and Canada. The filing covers the 13-week and 39-week periods ended April 28, 2018, compared with the periods ended April 29, 2017. The company operated 33 distribution centers, served more than 43,000 customer locations and reported Whole Foods Market as its largest customer.
Financial performance and key metrics
| Metric | Q3 FY2018 | Q3 FY2017 | 39 Weeks FY2018 | 39 Weeks FY2017 |
|---|---|---|---|---|
| Net sales | $2.649 billion | $2.370 billion | $7.634 billion | $6.933 billion |
| Gross profit | $408.1 million | $366.4 million | $1.147 billion | $1.060 billion |
| Gross margin | 15.41% | 15.46% | 15.02% | 15.29% |
| Operating income | $82.2 million | $64.9 million | $177.5 million | $164.6 million |
| Operating margin | 3.10% | 2.74% | 2.32% | 2.37% |
| Net income | $51.9 million | $36.6 million | $132.9 million | $91.3 million |
| Diluted EPS | $1.02 | $0.72 | $2.61 | $1.80 |
| Effective tax rate | 33.3% | 39.4% | 20.3% | 39.5% |
Quarterly sales increased 11.8%, while year-to-date sales increased 10.1%. Quarterly net income rose approximately 42%; year-to-date net income rose approximately 46%. Results benefited from a $20.9 million change in the estimate for accrued inventory purchases, which increased net income by $13.9 million, or $0.27 per diluted share, in both the quarter and year-to-date period.
Cash flow from operations was negative $55.2 million for the first 39 weeks of fiscal 2018, compared with $163.1 million of operating cash flow in the prior-year period. The decline primarily reflected increases of $165.0 million in inventory and $119.1 million in accounts receivable. Capital expenditures were $29.6 million, compared with $40.0 million in the prior-year period.
At April 28, 2018, cash and cash equivalents were $21.8 million. Total debt consisted of $329.0 million of revolving-credit borrowings, $153.2 million of long-term debt including the current portion, and other financing obligations included in long-term debt. The revolving facility had $528.5 million of remaining availability after borrowings and letters of credit. The company was in compliance with its term-loan covenants and was not subject to the springing fixed-charge coverage covenant during the quarter.
Material changes versus the prior comparable period
- Sales growth was led by Whole Foods Market, where quarterly sales increased approximately 24% and represented 37% of company sales, compared with 34% in the prior-year quarter. Whole Foods sales benefited from same-store growth following its acquisition by Amazon and from health, beauty and supplement categories.
- Sales mix shifted toward lower-margin supernatural-chain and conventional-supermarket customers. This, together with higher inbound freight costs, reduced gross margin by 5 basis points in the quarter and 27 basis points year to date.
- Operating expenses improved as a percentage of sales, from 12.72% to 12.30% in the quarter and from 12.92% to 12.70% year to date, reflecting fixed-cost leverage despite higher fulfillment costs and share-based compensation.
- Prior-year quarterly results included $3.9 million of restructuring and impairment expenses. Fiscal 2018 included $11.4 million of year-to-date restructuring and impairment expenses, primarily related to the Earth Origins retail business.
- The company repurchased 564,660 shares for $22.2 million during the first 39 weeks under a $200 million authorization. No shares were repurchased during the third quarter.
- Working capital increased 21.3% from July 29, 2017, to approximately $1.16 billion at April 28, 2018. Days sales outstanding increased to 22 from 21, while days in inventory improved to 47 from 48.
Guidance, outlook, commentary and risks
- Management expected fiscal 2018 net sales to grow over fiscal 2017 levels and updated diluted EPS guidance based on year-to-date performance, the accounting-estimate benefit, continued sales growth and expected operational and corporate impacts. The filing does not state the specific revised EPS guidance amount.
- Management planned fiscal 2018 capital expenditures of approximately 0.6% to 0.7% of net sales and expected to fund operations and planned capital spending with operating cash flow and revolving-credit borrowings.
- The company expects approximately $1.4 million of additional Earth Origins restructuring charges in the fourth quarter of fiscal 2018. Three underperforming stores were selected for closure, with two closed during the third quarter.
- The warehouse management system had been implemented at 15 facilities, with rollout to all existing U.S. broadline facilities expected by the end of fiscal 2019. The company also expected to commence construction and open additional distribution capacity after fiscal 2018.
- Key risks include dependence on Whole Foods Market, competitive pressure from conventional grocers and online distributors, low industry margins, customer and supplier concentration, supply-chain disruption, labor and fuel costs, foreign exchange, execution of warehouse and transportation systems, acquisitions, and potential additional Earth Origins charges.
- The company expects to adopt the new revenue-recognition standard in fiscal 2019 using the modified retrospective method and preliminarily expects no material quantitative impact. Most operating leases are expected to be recognized on the balance sheet upon adoption of the new lease standard in fiscal 2020.
- There were no pending material legal proceedings, no material changes to previously reported risk factors, and management concluded that disclosure controls and procedures were effective.
Most important facts for investors to verify
- Determine the revised fiscal 2018 diluted EPS guidance disclosed in the related June 6, 2018 earnings release, because the 10-Q references but does not provide the specific amount.
- Separate the $13.9 million after-tax earnings benefit from recurring operating performance when assessing quarterly and year-to-date profitability.
- Monitor Whole Foods Market concentration, which rose to approximately 37% of quarterly sales and 36% of year-to-date sales.
- Assess whether inventory and receivables growth normalizes and whether operating cash flow recovers from the $55.2 million year-to-date use of cash.
- Track gross-margin pressure from customer mix and inbound freight, as well as the company’s ability to achieve planned operating efficiencies.
- Verify the timing and cost of Earth Origins closures and any additional restructuring or impairment charges.
- Review debt utilization, variable-rate exposure, covenant compliance and remaining revolving-credit availability as working-capital needs evolve.