United Natural Foods, Inc. — Fiscal 2021 Third-Quarter Form 10-Q
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 filing covers the 13-week quarter and 39-week year-to-date period ended May 1, 2021, compared with periods ended May 2, 2020. Reportable segments are Wholesale and Retail.
Retail was reclassified from discontinued operations to continuing operations beginning in fiscal 2020; prior periods were conformed. Four Shoppers locations remained in discontinued operations at May 1, 2021.
Financial performance and key metrics
| Metric | Q3 FY2021 | Q3 FY2020 | YTD FY2021 | YTD FY2020 |
|---|---|---|---|---|
| Net sales | $6.620 billion | $7.032 billion | $20.181 billion | $19.760 billion |
| Gross profit | $966.8 million | $1.050 billion | $2.924 billion | $2.875 billion |
| Gross margin | 14.60% | 14.94% | 14.49% | 14.55% |
| Operating income | $90.5 million | $124.3 million | $245.1 million | $(274.6) million |
| Net income attributable to UNFI | $48.6 million | $88.1 million | $106.5 million | $(326.5) million |
| Diluted EPS | $0.80 | $1.60 | $1.78 | $(6.10) |
| Adjusted EBITDA | $179.5 million | $222.2 million | $544.8 million | $475.0 million |
Quarterly sales declined 5.9%, primarily because the prior-year quarter benefited from an initial pandemic-related demand surge. Year-to-date sales increased 2.1%, supported by pandemic-related food-at-home demand and cross-selling. Q3 Wholesale Adjusted EBITDA declined 19.4% to $161.1 million; Retail Adjusted EBITDA declined 41.7% to $21.5 million. Year-to-date Wholesale and Retail Adjusted EBITDA increased 15.2% and 20.8%, respectively.
Q3 operating expenses decreased 4.9% but rose to 13.09% of sales from 12.96% because lower sales caused deleveraging. Supplier-related income declined, reducing gross margin. The year-to-date comparison benefited substantially from the absence of the $425.4 million goodwill and asset impairment charge recorded in fiscal 2020.
Cash flow, debt and liquidity
- Year-to-date cash provided by operating activities was $336.4 million, including $334.4 million from continuing operations, versus $452.3 million and $449.2 million, respectively, in the prior year.
- Year-to-date capital expenditures were $165.5 million versus $126.8 million; investing cash use was $110.7 million.
- Financing activities used $233.7 million, including $787.2 million of debt and finance-lease repayments, partially offset by $500.0 million of new long-term borrowings.
- Cash and cash equivalents were $39.5 million at May 1, 2021, down from $47.0 million at August 1, 2020.
- Total debt, including the current portion, was $2.327 billion, down from $2.498 billion. Debt comprised approximately $1.002 billion under the Term Loan Facility, $839.3 million under the ABL facility and $500.0 million of senior notes, net of issuance costs and discounts.
- Liquidity was $1.182 billion, consisting of $39.5 million of cash and $1.143 billion of remaining ABL availability. The ABL facility had $117.5 million of letters of credit outstanding.
- The company issued $500.0 million of 6.75% senior notes due October 2028 and used the proceeds, together with ABL borrowings, to repay Term Loan borrowings. A third-quarter amendment reduced Term Loan applicable margins by 75 basis points.
Material changes, outlook and unusual items
- Management expects fiscal 2021 capital expenditures of approximately $250 million to $300 million, primarily for distribution-network and technology investments. No clear full-year revenue or earnings guidance is provided in the filing.
- UNFI expects to begin distribution from a new approximately 1.3 million-square-foot Allentown, Pennsylvania facility in the first half of fiscal 2022. Most Key Food supply activity is also expected to begin in the first quarter of fiscal 2022 under a 10-year agreement with expected sales of approximately $10 billion over its term.
- The Whole Foods distribution agreement was extended to September 27, 2027, satisfying a Term Loan maturity-extension requirement.
- Restructuring, acquisition and integration expenses were $9.9 million in Q3 and $44.1 million year-to-date. Management expects additional advisory, integration and distribution-center costs during fiscal 2021.
- COVID-19 effects remain uncertain. Management expects food-at-home demand to remain elevated relative to pre-pandemic levels but notes that pandemic-related sales and gross-margin benefits have moderated.
- Other risks include customer concentration, low industry margins, competition, supply-chain and labor disruptions, inflation and fuel costs, technology implementation, potential asset impairments and costs associated with retail divestitures or multiemployer pension obligations.
- Guarantees for certain retailer obligations had a maximum undiscounted exposure of $28.0 million, with $1.0 million accrued. The company also had approximately $243 million of non-cancelable future purchase obligations.
- UNFI disclosed opioid-related litigation, prescription-pricing claims and a False Claims Act matter. No material accrued obligation had been recorded for these proceedings as of May 1, 2021, but management cautions that outcomes could materially affect results.
- The company does not pay a common-stock dividend and does not expect share repurchases during fiscal 2021. The filing states that disclosure controls were effective and that there were no material changes to internal control over financial reporting.
Most important facts for investors to verify
- Whether post-pandemic normalization further reduces Wholesale and Retail sales, supplier income and operating leverage.
- Progress toward the stated $250 million to $300 million fiscal 2021 capital-spending plan and the timing and execution of the Allentown facility.
- Debt reduction, ABL availability, interest-rate exposure and potential fiscal 2022 excess-cash-flow prepayments.
- The realization of Supervalu integration, network-optimization and cross-selling synergies, net of ongoing restructuring costs.
- Potential costs from retail divestitures, multiemployer pension plans, guarantees and pending legal proceedings.
- The effect of customer concentration, particularly Whole Foods and other major customers, and the terms and ramp-up of the Key Food agreement.