United Natural Foods, Inc. Form 10-Q Summary
Business Context and Reporting Period
United Natural Foods, Inc. distributes and retails natural, organic and specialty food and non-food products primarily in the United States and Canada. The company reported unaudited results for the quarter and nine months ended May 3, 2014, compared with April 27, 2013. Wholesale is the only reportable segment; “Other” includes retail, manufacturing and unallocated corporate activities.
- The company operated 27 distribution centers totaling approximately 6.3 million square feet and served more than 31,000 customer locations.
- Whole Foods Market represented approximately 36% of net sales in both the quarter and nine-month period.
- Trudeau Foods, acquired September 26, 2013, contributed approximately $18.0 million of quarterly sales and $44.2 million of nine-month sales.
Financial Performance and Key Metrics
| Metric | Three Months Ended May 3, 2014 | Prior Comparable Period | Change |
|---|
| Net sales | $1.782 billion | $1.566 billion | Up 13.8% |
| Gross profit | $298.1 million | $263.0 million | Up 13.4% |
| Gross margin | 16.7% | 16.8% | Down 10 basis points |
| Operating income | $62.6 million | $53.9 million | Up 16.3% |
| Operating margin | 3.5% | 3.4% | Up 10 basis points |
| Net income | $36.4 million | $31.6 million | Up 15.1% |
| Diluted EPS | $0.73 | $0.64 | Up $0.09 |
| Metric | Nine Months Ended May 3, 2014 | Prior Comparable Period | Change |
|---|
| Net sales | $5.030 billion | $4.422 billion | Up 13.7% |
| Gross profit | $837.5 million | $740.6 million | Up 13.1% |
| Gross margin | 16.7% | 16.7% | Flat |
| Operating income | $159.5 million | $129.4 million | Up 23.2% |
| Operating margin | 3.2% | 2.9% | Up 30 basis points |
| Net income | $92.1 million | $75.8 million | Up 21.5% |
| Diluted EPS | $1.85 | $1.53 | Up $0.32 |
- Quarterly sales growth reflected organic growth, approximately 1.6% food-price inflation and Trudeau Foods. Conventional supermarket sales increased 18%, while supernatural chain sales increased 12%.
- Nine-month sales growth included approximately 1.8% food-price inflation. Conventional supermarket sales increased 17% and supernatural chain sales increased 12%.
- Operating expenses rose 12.6% for the quarter and 10.9% for the nine months, but declined as a percentage of sales to 13.2% and 13.5%, respectively.
- The effective tax rate was 40.0% for both the quarter and nine months, compared with 39.5% and 37.3%, respectively, in the prior periods.
Cash Flow, Balance Sheet, Debt and Liquidity
- At May 3, 2014, cash and cash equivalents were $16.6 million, total assets were $2.038 billion and stockholders’ equity was $1.201 billion.
- Current assets were $1.340 billion versus current liabilities of $463.0 million, producing working capital of approximately $877.1 million.
- Accounts receivable were $420.9 million and inventories were $831.5 million, compared with $339.6 million and $702.2 million at August 3, 2013.
- Nine-month operating cash flow was negative $20.6 million, improving from negative $36.0 million in the prior period. Working-capital investment included increases of $126.6 million in inventories and $81.5 million in accounts receivable.
- Investing cash flow was negative $124.9 million, including $107.9 million of capital expenditures and $23.0 million for acquisitions.
- Financing cash flow was positive $151.0 million, principally from borrowings under the revolving credit facility.
- Notes payable were $268.2 million, and long-term debt including the current portion was $34.0 million. The Aurora, Colorado facility financing obligation was approximately $33.7 million.
- As of May 3, 2014, the borrowing base was $487.9 million, outstanding revolving borrowings were $268.2 million, and letter-of-credit commitments and reserves were $36.4 million. Remaining availability was $183.3 million.
- On May 21, 2014, the revolving facility was increased from $500 million to $600 million and extended to May 21, 2019. The amended facility permits an additional increase of up to $150 million, subject to conditions.
Material Changes Versus the Prior Comparable Period
- Sales and earnings increased materially, driven by organic growth, customer expansion, food-price inflation and the Trudeau Foods acquisition.
- Gross margin was slightly lower for the quarter and flat for the nine months, reflecting channel mix, Canadian foreign-exchange effects, weather-related freight costs and prior-period spoilage.
- Operating leverage improved as operating expenses declined as a percentage of sales. The prior-year periods included approximately $1.5 million of quarterly and $6.1 million of nine-month labor-action costs, as well as a $1.6 million intangible-asset impairment and a $4.9 million unclaimed-property settlement charge in the nine-month period.
- Capital expenditures increased substantially because of construction of distribution centers in Sturtevant, Wisconsin and Montgomery, New York.
- Interest expense increased because of the Aurora facility financing obligation and higher borrowings.
Guidance, Outlook, Commentary and Risks
- Management expected sales for the remainder of fiscal 2014 to exceed the comparable prior-year period, with growth concentrated in lower-gross-margin supernatural and conventional supermarket channels.
- Management expected operating cash flow of $50 million to $100 million in each of fiscal 2014 and fiscal 2015.
- Fiscal 2014 capital expenditures were expected to approximate 2.2% to 2.4% of net sales.
- The national warehouse-management and procurement-system rollout was expected to reach all existing facilities by the end of fiscal 2017, with anticipated supply-chain and operating-efficiency benefits.
- On May 22, 2014, the company agreed to acquire Tony’s Fine Foods for approximately $195.3 million, including approximately $187.8 million in cash and approximately 112,000 shares of common stock. Closing remained subject to regulatory approvals, third-party consents and other conditions.
- Management expected to finance the Tony’s cash consideration with cash and revolver borrowings and anticipated an approximately $150 million real-estate-backed term loan in the fourth quarter of fiscal 2014 or first quarter of fiscal 2015.
- Key risks include customer concentration, relatively low margins, exposure to fuel and foreign-exchange costs, inflation or deflation, supply-chain disruption, technology implementation, labor matters, acquisition integration and access to capital.
- The company had fixed-price fuel commitments for approximately 8.9 million gallons through December 2014 at prices ranging from $3.17 to $4.00 per gallon.
- Management stated that routine litigation was not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the Tony’s Fine Foods acquisition closed on the expected timetable and at the stated purchase price, and whether projected synergies were realized.
- Post-acquisition leverage, revolver availability and completion of the anticipated real-estate-backed term loan.
- Conversion of reported earnings into operating cash flow, particularly given substantial inventory and receivables growth.
- Execution and cost savings from the warehouse-management and procurement-system rollout.
- Gross-margin trends as sales continue shifting toward Whole Foods Market and conventional supermarkets.
- Exposure to Whole Foods Market, which accounted for approximately 36% of sales, and the status of the distribution agreement expiring September 25, 2020.
- Impact of fuel prices, Canadian foreign exchange, facility construction costs and potential acquisition-integration expenses.
