United Natural Foods, Inc. — Fiscal 2016 First-Quarter Form 10-Q
Reporting period: Three months ended October 31, 2015; comparative period ended November 1, 2014. Financial statements are unaudited. UNFI distributes and retails natural, organic and specialty products in the United States and Canada, with wholesale as its only reportable segment.
Key Financial Metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $2.077 billion | $1.992 billion | +4.2% |
| Gross profit | $313.9 million | $319.0 million | -1.6% |
| Gross margin | 15.1% | 16.0% | -90 basis points |
| Operating income | $53.9 million | $58.4 million | -7.7% |
| Operating margin | 2.6% | 2.9% | -30 basis points |
| Net income | $30.1 million | $33.0 million | -8.8% |
| Diluted EPS | $0.60 | $0.66 | -$0.06 |
| Cash flow from operations | $5.5 million | $(98.7) million | Improved by $104.2 million |
Operating expenses were $260.0 million, or approximately 12.5% of sales, compared with $260.6 million, or 13.1%, in the prior-year quarter. The effective tax rate was 39.9%, compared with 39.5%. Interest expense was $3.7 million, including $0.4 million related to the Providence headquarters capital lease.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $12.3 million at October 31, 2015, down from $17.4 million at August 1, 2015.
- Total assets were $2.650 billion; total liabilities were $1.230 billion; and stockholders’ equity was $1.420 billion.
- Inventories increased to $1.083 billion from $982.6 million, reflecting increased buying ahead of the holiday season. Accounts payable increased to $495.6 million from $390.1 million.
- Debt included $307.6 million outstanding under the revolving credit facility, $137.5 million under the real-estate-backed term loan, and other long-term and lease-related obligations. Total long-term debt, including the current portion, was $183.5 million, excluding revolving notes payable.
- The revolving facility had a $582.7 million borrowing base, $35.2 million of letter-of-credit commitments, and $239.8 million of remaining availability at October 31, 2015. UNFI was not subject to the facility’s springing fixed-charge coverage covenant during the quarter.
- Management stated that cash on hand and available revolving credit were sufficient for operations and planned capital expenditures over the next 12 months.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven by organic growth, Whole Foods Market and other channels, food-price inflation of approximately 2.4%, and the Tony’s business. Conventional-supermarket sales declined approximately 3%, or $18 million, following termination of a large customer relationship in September 2015.
- Whole Foods Market represented approximately 34% of quarterly sales, up from 33%, and sales to that customer increased approximately 7%.
- Gross margin declined because of unfavorable foreign exchange in Canada, lower fuel surcharges, moderated supplier promotional activity, and a mix shift toward lower-margin supermarket channels.
- Operating income and net income declined despite lower operating expenses, primarily because of gross-margin pressure, restructuring costs, and other items.
- Restructuring expenses were $2.8 million, principally severance, early lease termination, and operational transfer costs associated with the cost-saving program following the lost customer relationship. Management expects an additional $1.2 million to $2.2 million of severance and related costs during the remainder of fiscal 2016.
- Operating cash flow improved substantially as inventory and receivables investment was lower than in the prior-year quarter and was partly offset by higher accounts payable.
- Capital expenditures declined to $7.6 million from $27.4 million, and investing cash use declined to $7.6 million from $38.1 million.
Guidance, Outlook and Risks
- Management expects fiscal 2016 sales to grow versus fiscal 2015, but at a lower percentage rate than fiscal 2015 growth. Growth is expected to be concentrated in lower-margin supernatural and conventional supermarket channels.
- Management expects fiscal 2016 operating cash flow of $80 million to $100 million and capital expenditures of approximately 0.6% to 0.7% of net sales.
- The company expects moderate food inflation of approximately 2% to 3% over the next 12 months and plans to use supply-chain efficiencies and its warehouse-management-system rollout to offset lower gross margins.
- The WMS rollout is expected to be completed across existing facilities by the end of fiscal 2018. A new Gilroy, California distribution center was expected to begin operations in the third quarter of fiscal 2016.
- Key risks include customer concentration, particularly Whole Foods Market; loss of major customers; lower-margin channel and product-mix shifts; execution of cost reductions and technology initiatives; fuel-price volatility; supply-chain disruptions; labor issues; economic and consumer-spending conditions; and risks associated with acquisitions and the Tony’s integration.
- The company uses an interest-rate swap to hedge $140 million of term-loan exposure; the swap increased interest expense by approximately $0.6 million in the quarter and had a fair value liability of $2.4 million at October 31, 2015.
- Management reported no material changes to previously disclosed risk factors, no material adverse expected effect from routine litigation, and effective disclosure controls.
Important Facts for Investors to Verify
- Whether sales growth and profitability can be sustained after termination of the large conventional-supermarket customer relationship.
- Whether gross-margin pressure from channel mix, foreign exchange, fuel surcharges, and supplier promotions continues.
- Progress against the stated $80 million to $100 million operating-cash-flow target and planned capital-expenditure range.
- Execution, cost, and timing of the restructuring program, WMS rollout, and Gilroy distribution-center opening.
- Whole Foods Market concentration and the terms of the distribution agreement, which runs through September 28, 2025.
- Compliance with term-loan financial covenants and the availability and borrowing-base calculation under the revolving credit facility.