United Natural Foods, Inc. Form 10-Q Summary
Business Context and Reporting Period
UNFI distributes natural, organic, specialty, produce and conventional grocery and non-food products and provides support services to retailers in the United States and Canada. The company reports Wholesale and Retail segments and operates 56 distribution centers and warehouses.
This filing covers the 13-week second quarter and 26-week year-to-date periods ended January 29, 2022, compared with periods ended January 30, 2021. The financial statements are unaudited. Two remaining stores classified as discontinued operations were sold during the second quarter.
Key Financial Metrics
| Metric | Q2 FY2022 | Q2 FY2021 | YTD FY2022 | YTD FY2021 |
|---|---|---|---|---|
| Net sales | $7,416 million | $6,900 million | $14,413 million | $13,584 million |
| Gross profit | $1,075 million | $995 million | $2,117 million | $1,965 million |
| Gross margin | 14.50% | 14.42% | 14.69% | 14.47% |
| Operating income | $125 million | $107 million | $232 million | $157 million |
| Income from continuing operations | $68 million | $58 million | $145 million | $58 million |
| Net income attributable to UNFI | $66 million | $59 million | $142 million | $58 million |
| Diluted EPS | $1.08 | $1.00 | $2.33 | $0.98 |
| Adjusted EBITDA | $201 million | $206 million | $390 million | $365 million |
| Cash flow from operating activities | Not separately provided | Not separately provided | $43 million | $207 million |
Second-quarter sales increased 7.5% and year-to-date sales increased 6.1%. Management attributed growth primarily to inflation, new business, cross-selling and higher sales to existing customers, partly offset by supply-chain challenges and modest market contraction.
Operating expenses increased 8.5% in the quarter and represented 12.73% of sales, versus 12.61% in the prior-year quarter. Higher transportation and distribution-center labor costs reflected investments in customer service amid a tight labor market.
Wholesale second-quarter sales increased to $7,132 million from $6,618 million, but Wholesale Adjusted EBITDA declined to $159 million from $188 million. Retail sales increased to $643 million from $633 million, while Retail Adjusted EBITDA increased to $30 million from $26 million.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $45 million at January 29, 2022, compared with $41 million at July 31, 2021.
- Total debt, including the current portion, was $2,323 million, up from $2,188 million, primarily because of increased ABL borrowings used to fund working-capital growth.
- Liquidity was $1,036 million, consisting of $45 million of cash and $991 million of unused ABL availability.
- The ABL facility had $2,096 million of total availability, $990 million of borrowings and $115 million of outstanding letters of credit.
- Working capital increased to $1,309 million from $1,063 million, primarily because of higher inventory and accounts receivable balances.
- The company remained in compliance with its debt covenants and had not been subject to the ABL fixed-charge coverage covenant through the filing date.
Cash Flow and Capital Allocation
Year-to-date operating cash flow fell to $43 million from $207 million, primarily because working capital absorbed cash through inventory increases and expanded customer receivables. Investing cash use increased to $129 million, including $106 million of capital expenditures and $26 million of investments. Financing activities provided $91 million, principally reflecting net ABL borrowings.
Capital expenditures were $106 million year-to-date versus $92 million in the prior-year period. Fiscal 2022 capital spending is expected to be approximately $250 million, focused on distribution-network optimization, technology and the Allentown, Pennsylvania distribution center. The company does not pay a dividend and does not expect share repurchases during fiscal 2022.
Material Changes and Unusual Items
- Gross margin improved modestly, helped by inflation and the ValuePath initiative, but the company recorded a higher LIFO charge and faced unfavorable customer mix.
- Restructuring, acquisition and integration costs declined to $5 million in the quarter and $8 million year-to-date, compared with $18 million and $34 million, respectively.
- Interest expense declined to $44 million in the quarter and $84 million year-to-date, primarily because of lower debt balances and interest rates. The quarter included a $6 million loss on debt extinguishment, including costs associated with the $150 million voluntary Term Loan prepayment.
- The effective tax rate was 26.9% for the quarter, versus 22.7%, but 14.2% year-to-date, versus 21.6%, reflecting discrete tax benefits from employee stock award vestings.
- In February 2022, the company acquired the Riverside, California distribution-center property for approximately $153 million and immediately completed a sale-leaseback for $225 million. Management expects an estimated $85 million pretax gain in the third quarter and used most of the after-tax proceeds to make a subsequent $44 million Term Loan prepayment in March 2022.
Guidance, Outlook and Risks
The filing does not provide clear full-year revenue or earnings guidance. Management expects to continue using free cash flow to reduce debt and improve leverage, while funding fiscal 2022 capital expenditures of approximately $250 million. Allentown is expected to incur start-up costs and operating losses during its fiscal 2022 ramp-up.
Key risks include COVID-19 developments, labor shortages and wage pressure, supply-chain disruptions, inflation and fuel-cost volatility, dependence on significant customers, competition and customer consolidation, technology implementation, food safety, customer credit risk, potential asset impairments, interest-rate and foreign-exchange exposure, and the possibility of multiemployer pension withdrawal liabilities.
UNFI is involved in opioid-related litigation, prescription-pricing claims and a False Claims Act matter. The filing states that no material legal accrual has been recorded and that management believes the matters are without merit or that material liability is not expected; however, actual outcomes could materially differ.
Investor Verification Checklist
- Verify whether sales growth is being driven by sustainable volume and customer wins or primarily by approximately 5% estimated cost inflation.
- Monitor Wholesale Adjusted EBITDA, transportation and labor costs, LIFO charges and the effect of ValuePath savings.
- Assess working-capital requirements, inventory levels and the sharp decline in year-to-date operating cash flow.
- Track debt reduction, ABL utilization, interest-rate exposure and the transition risks associated with LIBOR-based swaps and borrowings.
- Evaluate the financial impact of the Riverside sale-leaseback, including the expected gain and new 15-year lease obligation.
- Review Allentown distribution-center ramp-up costs, fiscal 2022 capital spending and potential network optimization charges.
- Follow developments in opioid, prescription-pricing and other legal proceedings, as well as multiemployer pension obligations.