Business Context and Reporting Period
United Natural Foods, Inc. (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 operates Wholesale and Retail reportable segments, serves more than 30,000 customer locations and operates 55 distribution centers and warehouses.
This unaudited Form 10-Q covers the 13-week third quarter ended April 27, 2024, compared with April 29, 2023, and the 39-week year-to-date periods. Fiscal 2024 contains 53 weeks, with a 14-week fourth quarter.
Financial Results and Key Metrics
| Metric | Q3 FY2024 | Q3 FY2023 | YTD FY2024 | YTD FY2023 |
|---|---|---|---|---|
| Net sales | $7,498 million | $7,507 million | $22,825 million | $22,855 million |
| Gross profit | $1,020 million | $1,000 million | $3,085 million | $3,165 million |
| Gross margin | 13.6% | 13.3% | 13.5% | 13.8% |
| Operating income | $6 million | $33 million | $6 million | $195 million |
| Net income attributable to UNFI | $(21) million | $7 million | $(75) million | $92 million |
| Diluted earnings per share | $(0.34) | $0.12 | $(1.26) | $1.51 |
| Adjusted EBITDA | $130 million | $159 million | $375 million | $547 million |
Q3 sales were essentially flat, as inflation and new business with existing customers offset lower unit volumes. Product cost inflation was approximately 2%. Retail identical-store sales declined 4.0%, primarily due to lower volume.
Q3 operating expenses increased 2.6% to $992 million, or 13.2% of sales, largely because incentive compensation expense was $13 million versus a $20 million benefit in the prior-year quarter. Q3 included $9 million of restructuring expenses and $13 million of asset-sale and other asset charges. Year-to-date results also included $28 million of asset impairment charges, including a $21 million corporate-office impairment and a $7 million retail-store impairment.
Excluding the non-cash LIFO charge, Q3 gross margin was 13.7% versus 13.8% in the prior-year quarter. Lower procurement gains from decelerating inflation and a lower Retail gross margin offset benefits from lower shrink expense.
Q3 Adjusted EBITDA declined 18.2% to $130 million. Wholesale Adjusted EBITDA declined to $125 million from $143 million, while Retail Adjusted EBITDA declined to negative $3 million from $18 million. Year-to-date Wholesale Adjusted EBITDA declined 20.2% to $360 million, and Retail Adjusted EBITDA declined 93.9% to $4 million.
Cash Flow, Debt and Liquidity
- Year-to-date operating cash flow was $54 million, compared with $402 million in the prior-year period.
- Year-to-date investing cash flow was $(226) million, including $217 million of capital expenditures and $23 million of investment payments.
- Year-to-date financing cash flow was $174 million, primarily reflecting net borrowings under the revolving credit facility.
- Cash and cash equivalents were $39 million at April 27, 2024, compared with $37 million at July 29, 2023.
- Total debt was $2,151 million, up from $1,963 million at fiscal year-end. Debt consisted principally of a $645 million Term Loan Facility, $1,026 million of ABL borrowings and $500 million of senior notes.
- Total liquidity was $1,264 million, comprising $39 million of cash and $1,225 million of unused ABL capacity. ABL availability was $2,427 million, net of $176 million of letters of credit and $1,026 million of borrowings.
- Working capital increased to $1,193 million from $1,058 million, principally because of lower accounts payable and higher accounts receivable, partly offset by lower inventories.
- Fiscal 2024 capital and cloud implementation spending is expected to be approximately $370 million. No dividend was paid, and no share repurchases were made year-to-date.
Material Changes Versus the Prior Comparable Period
- Sales declined 0.1% in both Q3 and year-to-date, while Q3 gross profit increased 2.0%; year-to-date gross profit decreased 2.5%.
- Operating income fell from $33 million to $6 million in Q3 and from $195 million to $6 million year-to-date.
- UNFI reported a Q3 net loss attributable to the company of $21 million, compared with $7 million of net income, and a year-to-date loss of $75 million versus $92 million of income.
- Adjusted EBITDA declined $29 million in Q3 and $172 million year-to-date, reflecting weaker wholesale profitability, materially lower Retail profitability, higher incentive compensation and transformation costs.
- Operating cash flow decreased $348 million year-to-date, while net debt increased because borrowings funded working capital, capital expenditures and investments.
Outlook, Management Commentary, Risks and Unusual Items
Management is finalizing a multi-year strategic plan expected to begin in fiscal 2025. Priorities include network optimization, cost management, working-capital efficiency, administrative restructuring, SKU optimization and reviews of commercial contracts. Management expects to continue reinvesting in the business while reducing leverage and outstanding debt.
On May 1, 2024, UNFI added a $130 million ABL FILO tranche and used those proceeds, together with additional ABL borrowings, to make a $145 million Term Loan prepayment. The Term Loan principal was reduced to $500 million and its maturity was extended to May 1, 2031, subject to springing maturity provisions. The amended Term Loan carries higher margins of base rate plus 3.75% or SOFR plus 4.75%. UNFI expects a $10 million debt-extinguishment loss in Q4 fiscal 2024.
On May 21, 2024, the Whole Foods Market distribution agreement was extended through May 20, 2032. Whole Foods remains a significant customer and the agreement extension satisfies a maturity condition in the amended Term Loan.
Key risks include customer concentration, low and competitively sensitive margins, inflation and deflation, lower consumer volumes, supplier and labor disruptions, technology and transformation execution, supply-chain interruptions, fuel-price volatility, additional asset impairments, access to capital and multiemployer pension obligations.
UNFI faces opioid-related litigation, a Minnesota prescription-drug pricing lawsuit and a False Claims Act action. The False Claims Act trial is scheduled to begin September 30, 2024; relators allege damages exceeding $100 million before trebling and statutory penalties. No material legal accruals were recorded as of April 27, 2024, but management cautions that outcomes could materially affect financial condition, results or cash flow.
Most Important Facts for Investors to Verify
- Whether the fiscal 2025 strategic plan produces sustainable cost savings, improved working-capital conversion and recovery in Wholesale and Retail margins.
- The sustainability of liquidity after the May refinancing, including higher Term Loan pricing, FILO borrowing costs, ABL availability and covenant compliance.
- Progress against the approximately $370 million fiscal 2024 capital and cloud-technology spending plan and the resulting effect on free cash flow.
- Whether lower unit volumes, the 4.0% Retail identical-store sales decline and reduced procurement gains persist.
- The financial exposure and developments in the False Claims Act, opioid-related and prescription-drug pricing proceedings.
- The effect of the Whole Foods agreement extension on customer concentration, debt maturity flexibility and future revenue stability.