United Natural Foods, Inc. — Fiscal 2016 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended April 30, 2016, compared with May 2, 2015. The company distributes natural, organic and specialty products in the United States and Canada through wholesale, retail and manufacturing operations. It operated 33 distribution centers and served more than 45,000 customer locations.
Key Financial Metrics
| Metric | Three months ended April 30, 2016 | Year-over-year change | Nine months ended April 30, 2016 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $2.132 billion | Up 0.8% | $6.256 billion | Up 2.2% |
| Gross profit | $322.4 million | Down 1.1% | $933.9 million | Down 1.1% |
| Gross margin | 15.1% | Down from 15.4% | 14.9% | Down from 15.4% |
| Operating income | $66.0 million | Down 4.3% | $161.6 million | Down 8.6% |
| Operating margin | 3.1% | Down from 3.3% | 2.6% | Down from 2.9% |
| Net income | $38.3 million | Down from $41.8 million | $91.1 million | Down from $102.6 million |
| Diluted EPS | $0.76 | Down from $0.83 | $1.81 | Down from $2.04 |
Cash Flow, Balance Sheet and Liquidity
- Operating cash flow was $205.6 million for the first nine months, compared with cash used in operations of $6.2 million in the prior-year period.
- Investing cash outflow was $118.2 million, including $89.2 million for acquired businesses and $29.1 million of capital expenditures.
- Financing cash outflow was $84.8 million. Cash and cash equivalents increased to $19.3 million from $17.4 million at August 1, 2015.
- At April 30, 2016, total assets were $2.646 billion and total liabilities were $1.156 billion. Stockholders’ equity was $1.490 billion.
- Debt included $266.9 million outstanding under the revolving credit facility, $132.5 million under the real-estate-backed term loan, and $13.8 million of capital lease obligations. Current and long-term debt, excluding revolving notes payable, totaled $178.1 million.
- The amended revolving facility provides up to $850 million for U.S. subsidiaries and $50 million for the Canadian subsidiary, with an option for up to $600 million of additional borrowing capacity. Availability at April 30, 2016 was $551.7 million after borrowings and letters of credit.
- Management expected fiscal 2016 operating cash flow of $200 million to $220 million and capital expenditures of approximately 0.5% of net sales.
Material Changes Versus the Prior Comparable Period
- Sales increased modestly, supported by growth in Whole Foods Market, independent retailers, foodservice, e-commerce and acquisitions. Conventional supermarket sales declined because a large customer relationship ended in September 2015.
- Whole Foods Market represented approximately 36% of quarterly and nine-month sales, up from 35% and 34%, respectively. This represents significant customer concentration.
- Gross margin contracted because of competitive pricing, reduced fuel surcharges, lower supplier promotional activity, foreign exchange effects and a shift toward lower-margin sales channels.
- Operating expenses were slightly lower in the quarter but higher for the nine-month period, reflecting higher sales-related costs, acquisition costs, facility start-up costs and $4.8 million of restructuring and impairment expenses.
- Interest and other expense increased, partly because of the term-loan interest-rate swap and the absence of a $4.2 million land-transfer gain recognized in the prior-year quarter.
- Restructuring measures related to the lost Albertsons/Safeway/Eastern Supermarket business generated $4.4 million of costs during the first nine months; $1.2 million remained payable at April 30, 2016.
Acquisitions, Outlook and Risks
- During the quarter, the company acquired Nor-Cal Produce for approximately $68.6 million and Global Organic/Specialty Source assets for approximately $20.6 million. The acquisitions expanded produce and organic distribution capabilities.
- On May 13, 2016, after quarter-end, the company acquired Haddon House Food Products and affiliates for approximately $217.5 million in cash, financed with cash and revolving-credit borrowings.
- Management expected fiscal 2016 sales to exceed the prior year, but anticipated slower percentage growth than in fiscal 2015. Growth was expected to be concentrated in lower-margin supernatural and conventional supermarket channels.
- The company expected supply-chain efficiencies and its warehouse-management-system rollout to reduce operating expenses as a percentage of sales. Full rollout was expected by the end of fiscal 2018.
- Key risks include customer concentration, loss or retention of major customers, lower gross margins, competition from conventional distributors and large retailers, fuel-price volatility, inflation or deflation, supply-chain disruptions, labor issues, execution of technology initiatives and integration of Global Organic, Nor-Cal and Haddon House.
- The company used fixed-price fuel contracts covering approximately 6.1 million gallons through December 2016, at prices ranging from $1.76 to $3.18 per gallon.
- The term loan contains financial covenants, including minimum fixed-charge coverage, maximum funded-debt-to-EBITDA and maximum loan-to-mortgaged-property-value ratios. The revolving facility has a springing fixed-charge coverage covenant when availability falls below specified thresholds.
- Management stated that pending routine litigation was not expected to have a material adverse effect. Disclosure controls were evaluated as effective, with no material change in internal control over financial reporting.
Investor Verification Points
- Verify the post-quarter-end financing, leverage and covenant impact of the $217.5 million Haddon House acquisition.
- Assess whether gross-margin pressure from customer mix, pricing and reduced fuel surcharges persists.
- Monitor dependence on Whole Foods Market and the effect of the lost conventional-supermarket relationship.
- Evaluate whether warehouse-management-system investments generate the forecast operating efficiencies and whether the rollout remains on schedule.
- Review integration costs, customer retention and purchase-accounting adjustments for Global Organic, Nor-Cal and Haddon House.
- Reconcile management’s $200 million–$220 million fiscal-year operating-cash-flow expectation with subsequent working-capital and acquisition cash requirements.