United Natural Foods, Inc. — Fiscal 2011 Form 10-K
Reporting period: Fiscal year ended July 30, 2011, comprising 52 weeks. The filing includes unaudited fourth-quarter data for the 13 weeks ended July 30, 2011. United Natural Foods distributes natural, organic and specialty products in the United States and Canada through wholesale, retail and manufacturing operations.
Key Financial Metrics
| Metric | Fiscal 2011 | Fiscal 2010 | Change |
|---|---|---|---|
| Net sales | $4.530 billion | $3.757 billion | +20.6% |
| Gross profit | $824.8 million | $696.9 million | +18.3% |
| Gross margin | 18.2% | 18.5% | Down 30 basis points |
| Operating income | $129.7 million | $114.9 million | +12.9% |
| Operating margin | 2.9% | 3.1% | Down 20 basis points |
| Net income | $76.7 million | $68.3 million | +12.2% |
| Diluted EPS | $1.60 | $1.57 | +1.9% |
| Cash flow from operations | $49.8 million | $66.1 million | Down $16.3 million |
Fourth-quarter fiscal 2011 net sales were $1.159 billion, gross profit was $215.3 million, income before taxes was $28.3 million, net income was $17.2 million and diluted EPS was $0.34. Fourth-quarter fiscal 2011 included restructuring and asset impairment charges associated with the planned divestiture and closure of the Harrison, Arkansas facility.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $16.9 million at July 30, 2011, compared with $13.8 million at July 31, 2010.
- Working capital increased to $381.1 million from $194.2 million, primarily following the October 2010 equity offering and debt repayment.
- The $400 million secured revolving credit facility had $115.0 million outstanding, $21.7 million of letters of credit and $1.3 million of reserves, leaving $262.0 million of availability.
- Long-term debt totaled $48.4 million, including $47.1 million under a term loan maturing in July 2012. The revolving credit facility matured in November 2012.
- The company was in compliance with its fixed-charge coverage covenants at year-end.
- Capital expenditures were $40.8 million in fiscal 2011. Management expected fiscal 2012 capital expenditures of approximately $47 million to $51 million.
- The company completed a secondary offering of 4.43 million shares at $33.00 per share, generating approximately $138.3 million of net proceeds used primarily to repay revolving-credit borrowings.
Material Changes Versus the Prior Period
- Sales growth reflected the full-year contribution from the Canadian distribution assets acquired from SunOpta and expanded Whole Foods Market distribution rights in the Rocky Mountain and Southwest regions.
- Whole Foods Market sales increased approximately 23.6% to about $1.627 billion and represented approximately 36% of total sales, versus 35% in fiscal 2010.
- Conventional supermarket sales increased approximately 28.5% to $991 million and rose to 22% of sales from 21%.
- Lower-margin supernatural-chain and conventional-supermarket sales represented approximately 58% of total sales, up from 56%, contributing to gross-margin compression.
- Operating expenses increased 19.4% to $695.1 million, including higher volume-related costs, $4.4 million of Lancaster, Texas labor and start-up costs, $0.6 million of executive severance and $6.3 million of restructuring and asset impairment expense.
- Inventory increased $66.3 million and accounts receivable increased $39.8 million, reducing operating cash flow. Days inventory increased to 51 from 50, and days sales outstanding increased to 22 from 20.
Outlook, Commentary and Risks
- Management expected fiscal 2012 sales to grow through organic growth, new customers, expanded product sales and food-price inflation, with most growth expected from lower-margin supermarket and supernatural-chain channels.
- Management expected fiscal 2012 and 2013 operating cash flow to average $75 million to $110 million annually and intended to limit capital expenditures to approximately 1% of sales.
- The company expected a fiscal 2012 effective tax rate of approximately 39.0% to 40.0%.
- The company entered into a three-year Safeway distribution arrangement and expected to begin national shipments in October 2011.
- The company agreed to sell its conventional non-foods and general merchandise business to L&R Distributors and planned to close the Harrison facility. Management estimated annual net-income accretion of approximately $1.5 million to $2.0 million after restructuring and impairment effects.
- Fiscal 2011 included a $5.8 million non-cash impairment charge on Harrison-related property and equipment and a $0.5 million transition charge. An additional $0.2 million impairment was recorded for indefinite-lived intangible assets.
- Key risks include dependence on Whole Foods Market, low distribution margins, customer and channel concentration, fuel and food-cost volatility, economic weakness, competition, technology implementation, acquisition integration, customer credit risk, labor relations and distribution disruptions.
- Whole Foods Market accounted for approximately 36% of fiscal 2011 net sales. No other customer represented at least 10% of sales.
- The company had approximately $548.5 million of disclosed contractual obligations, including inventory purchase commitments, debt, deferred compensation and operating leases, excluding interest payments.
- Management reported no pending material legal proceedings, and KPMG expressed unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Investor Verification Items
- Verify the timing and financial impact of the L&R divestiture and Harrison facility closure, including remaining restructuring charges in fiscal 2012.
- Assess whether Safeway onboarding and expanded supermarket volume can offset structurally lower gross margins and customer-service costs.
- Monitor Whole Foods Market concentration and the company’s ability to renew or maintain the distribution relationship through its September 2020 expiration.
- Review refinancing plans for the revolving credit facility and the $47.1 million term-loan maturity in 2012, together with covenant compliance.
- Track working-capital requirements, particularly inventory and receivables growth, because fiscal 2011 operating cash flow lagged net income substantially.
- Evaluate whether the national warehouse-management and supply-chain platform achieves projected efficiencies after the Lancaster start-up issues.
- Confirm the effect of the Canadian acquisition, Safeway growth and channel mix on fiscal 2012 margins and earnings.