United Natural Foods, Inc. — Fiscal 2022 Third-Quarter Form 10-Q
Reporting period: The filing covers the 13-week quarter and 39-week year-to-date period ended April 30, 2022, compared with periods ended May 1, 2021. UNFI distributes natural, organic, specialty, produce and conventional grocery and non-food products in the United States and Canada through Wholesale and Retail segments.
Key Financial Metrics
| Metric | Q3 FY2022 | Q3 FY2021 | YTD FY2022 | YTD FY2021 |
|---|---|---|---|---|
| Net sales | $7.242 billion | $6.631 billion | $21.655 billion | $20.215 billion |
| Gross profit | $1.012 billion | $970 million | $3.129 billion | $2.935 billion |
| Gross margin | 14.0% | 14.6% | 14.4% | 14.5% |
| Operating income | $123 million | $92 million | $355 million | $249 million |
| Net income attributable to UNFI | $67 million | $48 million | $209 million | $106 million |
| Diluted EPS | $1.10 | $0.80 | $3.44 | $1.78 |
| Adjusted EBITDA | $196 million | $185 million | $616 million | $564 million |
| Cash flow from continuing operations | Not separately provided | Not separately provided | $(31) million | $338 million |
Q3 sales increased 9.2%, while year-to-date sales increased 7.1%. Q3 net income attributable to UNFI increased 40%, and year-to-date net income increased 97%. Q3 diluted EPS increased 38%, and year-to-date diluted EPS increased 93%.
Excluding the non-cash LIFO charge, Q3 gross margin was 15.0% versus 14.7% in the prior-year quarter; year-to-date adjusted gross margin was 14.9% versus 14.6%. The non-cash LIFO charge was $72 million in Q3 and $102 million year-to-date, compared with $5 million and $19 million, respectively, in the prior-year periods.
Material Changes Versus Prior Comparable Period
- Sales growth was driven by inflation, new and existing customer business, cross-selling, and higher sales in the Independent retailers and Supernatural channels. Supply-chain challenges and modest market contraction partially offset growth.
- Wholesale Q3 sales increased $610 million to $6.977 billion, and Wholesale Adjusted EBITDA increased $5 million to $171 million. Retail sales increased $12 million to $602 million, but Retail Adjusted EBITDA declined $9 million to $14 million.
- Retail identical-store sales increased 2.4% in Q3 and 1.1% year-to-date, primarily from higher average basket sizes.
- Operating expenses increased 11.6% in Q3, including higher transportation, distribution-center labor and occupancy costs. Management cited labor shortages, reliance on third-party resources and wage inflation.
- Operating income benefited from an $87 million pre-tax gain on a sale-leaseback of the Riverside, California distribution center. The company acquired the property for approximately $153 million and received $225 million in sale proceeds, while entering into a 15-year lease.
- Restructuring, acquisition and integration expenses declined to $8 million in Q3 and $16 million year-to-date, from $10 million and $44 million, respectively.
- Interest expense declined to $37 million in Q3 and $121 million year-to-date, from $44 million and $164 million, primarily due to lower debt balances and lower average interest rates.
Liquidity, Debt and Cash Flow
- Cash and cash equivalents were $48 million at April 30, 2022, compared with $41 million at July 31, 2021.
- Total debt was $2.391 billion, up from $2.188 billion, primarily because of additional ABL borrowings used to fund working-capital growth. Long-term debt included an $800 million term loan, $1.101 billion of ABL borrowings and $500 million of senior notes.
- Total reported liquidity was $909 million, consisting of $861 million of unused ABL credit and $48 million of cash.
- Working capital increased to $1.591 billion from $1.063 billion, primarily because of higher inventory and accounts receivable associated with new customers, sales growth and supply-chain constraints.
- Year-to-date operating cash flow was negative $31 million, compared with $338 million of cash provided in the prior-year period. The deterioration primarily reflected increased inventory and accounts receivable, partially offset by higher accounts payable.
- Year-to-date capital expenditures were $158 million, compared with $165 million. Investing cash flow was $45 million, helped by $231 million of asset-disposition proceeds.
- On June 3, 2022, after quarter-end, UNFI entered into a new $2.6 billion secured ABL facility, used it to repay the prior ABL facility and increased available liquidity by approximately $500 million based on borrowing-base levels at closing.
- The company also amended its term loan and interest-rate swaps after quarter-end to replace LIBOR with Term SOFR. Management did not expect a material accounting impact.
Guidance, Outlook, Commentary and Risks
- Management expected fiscal 2022 capital expenditures of approximately $250 million, including distribution-network, technology and Allentown, Pennsylvania distribution-center investments.
- Management stated that it expects to fund debt maturities and capital expenditures through internally generated cash, asset-sale proceeds and borrowings under the new ABL facility. It intends to continue using free cash flow to reduce debt and improve leverage.
- The Allentown distribution center began shipping in the first quarter of fiscal 2022. Management expected operating losses and start-up costs to continue during fiscal 2022 as volumes ramp.
- Management estimated aggregate cost inflation of approximately 7% in Q3. Inflation increased sales and, excluding LIFO, helped gross-margin performance, but it also increased operating costs and created significant LIFO charges.
- Key risks include COVID-19 developments, labor shortages and wage costs, supply-chain disruptions, fuel and foreign-exchange volatility, customer concentration and credit risk, competitive pressure, low industry margins, technology implementation, food safety, potential asset impairments and the ability to realize benefits from acquisitions and strategic initiatives.
- UNFI was named in opioid-related litigation, prescription-pricing litigation and a False Claims Act matter. Management had not recorded material accrued obligations for these proceedings but stated that outcomes and related exposures could differ materially from current assessments.
- The company had approximately $300 million of non-cancelable future purchase obligations, most expected to be paid and utilized within one year. Guarantee obligations had a maximum undiscounted exposure of $23 million, with an estimated $1 million loss recorded.
Important Facts for Investors to Verify
- Assess whether sales growth from inflation and new business converts into sustainable volume and margin expansion after LIFO effects normalize.
- Monitor working-capital requirements, inventory levels and operating cash flow, which turned negative year-to-date despite higher earnings.
- Review leverage, interest-rate exposure, term-loan maturities and borrowing-base availability under the new ABL facility.
- Separate the $87 million sale-leaseback gain from recurring operating performance and evaluate the resulting 15-year lease obligation.
- Track Wholesale execution versus continued Retail EBITDA pressure, labor costs and Allentown distribution-center ramp-up losses.
- Review the potential financial impact of opioid, prescription-pricing, False Claims Act and other legal contingencies, as no material accrued liability was recorded.
- Confirm the company’s stated fiscal 2022 capital-expenditure expectation of approximately $250 million and its ability to reduce debt using internally generated funds.