United Natural Foods, Inc. — Fiscal 2023 First-Quarter Form 10-Q
Reporting period: 13 weeks ended October 29, 2022, compared with the 13 weeks ended October 30, 2021. UNFI distributes natural, organic, specialty, produce and conventional grocery and non-food products and operates Wholesale and Retail segments in the United States and Canada.
Financial performance and position
- Net sales: $7.532 billion, up 7.6% from $6.997 billion, primarily reflecting approximately 10% product-cost inflation and new business, partly offset by lower unit volumes.
- Gross profit: $1.096 billion, up 5.2%. Gross margin declined to 14.6% from 14.9%; excluding the non-cash LIFO charge, margin was 14.8% versus 15.0%.
- Operating income: $99 million, down from $107 million. Operating expenses rose 7.3% to $1.000 billion, driven by transportation, distribution-center labor and occupancy costs.
- Net income attributable to UNFI: $66 million, compared with $76 million. Diluted earnings per share declined to $1.07 from $1.25.
- Adjusted EBITDA: $207 million, up from $200 million. Wholesale Adjusted EBITDA declined to $171 million from $175 million; Retail declined to $20 million from $22 million; Other increased to $19 million from $4 million.
- Cash flow: Operating activities used $262 million, compared with $81 million used in the prior-year quarter, primarily because of seasonal inventory investment and reduced accounts payable relative to inventory growth. Investing activities used $61 million, including $67 million of capital expenditures. Financing activities provided $319 million.
- Liquidity: Cash was $39 million at October 29, 2022. ABL availability was $1.250 billion, producing total liquidity of approximately $1.289 billion.
- Debt: Total debt was $2.499 billion, up from $2.123 billion at fiscal year-end, primarily due to $377 million of net ABL borrowings used to fund seasonal working capital. The company had $1.217 billion of ABL loans outstanding and $133 million of letters of credit.
- Balance sheet: Inventories increased to $2.756 billion from $2.355 billion, and accounts receivable increased to $1.351 billion from $1.214 billion. Working capital increased to $1.795 billion from $1.380 billion.
- Interest-rate management: UNFI had $1.200 billion of floating-rate notional debt subject to interest-rate swaps, with fixed rates ranging from 2.274% to 2.875% and maturities through October 2025.
Material changes versus the prior comparable period
- Sales growth was strong, but inflation and customer-mix changes pressured gross margin, while labor, transportation and occupancy costs increased.
- Operating income fell 7.5% and net income attributable to UNFI fell 13.2%, despite a 7.6% increase in sales.
- Adjusted EBITDA increased 3.5%, benefiting from adjustments including the non-cash LIFO charge and a $5 million gain on sale of assets.
- Operating cash flow deteriorated by $181 million because of working-capital investment, requiring increased ABL borrowing.
- UNFI authorized a new $200 million, four-year share-repurchase program and repurchased approximately 0.4 million shares for $12 million during the quarter; $188 million remained authorized at quarter-end.
Outlook, commentary, risks and unusual items
- Management expects fiscal 2023 capital expenditures of approximately $350 million, focused on distribution-network automation, optimization and expansion and technology investments.
- Subsequent to quarter-end, UNFI sold $253 million of eligible receivables without recourse under a program permitting sales of up to $300 million. It used the proceeds to make a $125 million voluntary Term Loan prepayment and reduce ABL borrowings.
- Management expects to fund fiscal 2023 debt maturities and finance-lease liabilities through internally generated funds and ABL borrowings, but reduced operating earnings or losses could limit debt-repayment capacity.
- Key operating risks include customer concentration, low and inflation-sensitive margins, labor shortages and wage pressure, supply-chain disruption, fuel and foreign-exchange volatility, technology implementation, competition, food safety, customer loss and potential asset impairments.
- UNFI contributes to underfunded multiemployer pension plans and expects approximately $51 million of fiscal 2023 contributions. A future withdrawal from such plans could create material withdrawal liabilities.
- The company remains involved in opioid-related litigation, prescription-drug pricing claims and a False Claims Act matter. No material legal accruals were recorded, but management cautions that outcomes and exposures could differ materially from current assessments.
- Guarantees had a maximum undiscounted exposure of $17 million, with an estimated $1 million loss recorded. Non-cancelable purchase obligations were approximately $582 million, most payable within one year.
- The company stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting.
Investor verification points
- Verify whether sales growth is translating into sustainable volume growth or is primarily inflation-driven.
- Monitor gross margin, customer mix and labor, transportation and occupancy costs.
- Assess working-capital intensity, inventory levels, operating cash flow and continued reliance on ABL borrowings.
- Track execution of the receivables-monetization program, Term Loan prepayment and progress toward deleveraging.
- Review capital spending against the approximately $350 million fiscal-year expectation and assess returns from distribution and technology investments.
- Evaluate interest-rate exposure despite the $1.2 billion swap portfolio, including the impact of floating-rate debt and swap maturities.
- Follow opioid, prescription-pricing and False Claims Act proceedings and any resulting indemnification or settlement exposure.