United Natural Foods, Inc. — Fiscal 2016 Second-Quarter Form 10-Q
Reporting period: Three and six months ended January 30, 2016, compared with January 31, 2015. The company distributes natural, organic and specialty products primarily in the United States and Canada. The filing is unaudited.
Business Context
- The wholesale division is the only reportable segment; “Other” includes retail, manufacturing, branded products and unallocated corporate costs.
- The company operated 31 distribution centers with approximately 7.7 million square feet of warehouse capacity and served more than 40,000 customer locations.
- Whole Foods Market represented approximately 37% of second-quarter sales and 36% of six-month sales, increasing customer concentration risk.
- The company terminated its distribution relationship with a large conventional supermarket customer in September 2015, resulting in lower conventional-supermarket sales.
Financial Performance
| Metric | Three months ended Jan. 30, 2016 | Three months ended Jan. 31, 2015 | Six months ended Jan. 30, 2016 | Six months ended Jan. 31, 2015 |
|---|---|---|---|---|
| Net sales | $2,047.7 million | $2,016.5 million | $4,124.4 million | $4,009.0 million |
| Gross profit | $297.5 million | $299.2 million | $611.5 million | $618.2 million |
| Gross margin | 14.5% | 14.8% | 14.8% | 15.4% |
| Operating income | $41.7 million | $49.5 million | $95.6 million | $107.9 million |
| Operating margin | 2.0% | 2.5% | 2.3% | 2.7% |
| Net income | $22.7 million | $27.8 million | $52.8 million | $60.9 million |
| Diluted EPS | $0.45 | $0.55 | $1.05 | $1.21 |
- Second-quarter sales increased 1.5%; six-month sales increased 2.9%.
- Second-quarter net income declined 18.5%; six-month net income declined approximately 13.3%.
- Second-quarter operating expenses were $255.8 million, including approximately $2.0 million of restructuring and transition costs and approximately $1.0 million of acquisition-related costs.
- Food price inflation was approximately 2.2% in the quarter and 2.3% for the six-month period.
Cash Flow, Debt and Liquidity
- Six-month operating cash flow was $124.6 million, compared with cash used in operations of $52.9 million in the prior-year period. The improvement primarily reflected lower inventory and accounts receivable balances.
- Capital expenditures were $20.5 million, versus $56.2 million in the prior-year period. Investing cash use was $20.4 million.
- Financing activities used $109.0 million, principally reflecting net repayments under the revolving credit facility and $5.8 million of long-term debt repayments.
- Cash and cash equivalents were $12.5 million at January 30, 2016, compared with $17.4 million at August 1, 2015.
- Revolving-credit borrowings were $275.8 million. The borrowing base was $580.1 million, with $35.1 million of letters of credit and $269.2 million of remaining availability.
- Long-term debt, including the current portion, was $180.6 million. Total reported debt and notes payable, including the revolving facility, was approximately $456.4 million.
- The company had $135.0 million outstanding under its real-estate-backed term loan and used an interest-rate swap to fix the effective rate on the hedged portion at approximately 4.295%.
- Management stated that available cash and credit were sufficient for operations, planned capital expenditures, the Global Organic acquisition and the proposed Haddon House acquisition.
Material Changes Versus the Prior Comparable Period
- Sales growth was supported by Whole Foods Market, independent retailers, foodservice and e-commerce, but was offset by the lost conventional-supermarket customer.
- Conventional-supermarket sales declined approximately 12% in the quarter and 8% for the six-month period.
- Gross margin contracted because of competitive pricing, lower supplier promotional activity, sales mix toward lower-margin channels, unfavorable Canadian foreign exchange and lower fuel surcharges.
- Operating income declined 15.8% in the quarter and 11.4% for the six-month period.
- Restructuring and asset-impairment expenses were $2.0 million in the quarter and $4.8 million for six months, versus $0.2 million and $0.8 million, respectively, in the prior-year periods.
- Total assets declined to $2.49 billion from $2.55 billion at August 1, 2015, while stockholders’ equity increased to $1.44 billion from $1.39 billion.
Guidance, Outlook and Unusual Items
- Management expected fiscal 2016 sales to grow year over year, but at a lower percentage rate than fiscal 2015.
- Management forecast fiscal 2016 operating cash flow of $100 million to $120 million and planned capital expenditures of approximately 0.6% to 0.7% of net sales.
- The company expected to complete its warehouse-management-system rollout to existing facilities by the end of fiscal 2018, with anticipated efficiency benefits.
- On February 28, 2016, the company agreed to acquire Haddon House Food Products and related entities for approximately $217.5 million in cash, subject to adjustments and closing conditions. Financing was expected to include cash and revolving-credit borrowings.
- On March 7, 2016, the company acquired certain Global Organic assets; the operations were to be combined with Albert’s Southeast business.
- Remaining restructuring liabilities were $1.8 million at January 30, 2016, primarily severance, and were expected to be substantially paid by fiscal year-end.
- Key risks include customer concentration, continued margin pressure, competition, fuel and food-price volatility, supply-chain disruption, execution of technology initiatives, acquisition integration and access to capital. The Haddon House transaction required regulatory approvals and other conditions and was not guaranteed to close.
- Management represented that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify the status, financing impact and closing conditions of the Haddon House acquisition.
- Assess whether Whole Foods Market concentration and the lost conventional-supermarket relationship are affecting future sales stability.
- Track gross-margin recovery versus the company’s expected shift toward lower-margin supermarket channels.
- Compare actual fiscal 2016 operating cash flow and capital expenditures with management’s stated ranges.
- Monitor revolving-credit utilization, remaining availability and compliance with the term-loan and revolving-facility covenants.
- Evaluate whether the warehouse-management-system rollout produces the expected operating-expense efficiencies.
- Review the effect of restructuring charges, acquisition costs, foreign exchange and fuel-price agreements on recurring earnings.