Business Context and Reporting Period
United Natural Foods, Inc. (UNFI) filed its Form 10-K for the 52-week fiscal year ended July 31, 2021. UNFI distributes natural, organic, specialty, produce and conventional grocery and non-food products and provides retail support services across the United States and Canada. Its reportable segments are Wholesale and Retail, with additional manufacturing and branded-product operations classified as Other.
UNFI operated 57 distribution centers and warehouses totaling approximately 30.3 million square feet and 74 continuing-operations grocery stores. Whole Foods Market represented approximately 19% of fiscal 2021 net sales. The filing extended UNFI’s Whole Foods distribution agreement through September 27, 2027.
Key Financial Metrics
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Net sales | $26.950 billion | $26.559 billion | Up 1.5% |
| Gross profit | $3.939 billion | $3.889 billion | Up 1.3% |
| Gross margin | 14.62% | 14.64% | Down 2 basis points |
| Operating income (loss) | $294 million | $(193) million | Improved $487 million |
| Net income (loss attributable to UNFI) | $149 million | $(274) million | Improved $423 million |
| Diluted EPS | $2.48 | $(5.10) | Improved $7.58 |
| Adjusted EBITDA | $746 million | $673 million | Up $73 million |
| Operating cash flow from continuing operations | $614 million | $457 million | Up $157 million |
| Capital expenditures | $310 million | $173 million | Up $137 million |
| Total debt | $2.188 billion | $2.498 billion | Down $310 million |
Wholesale net sales increased to $25.873 billion from $25.525 billion, while Wholesale Adjusted EBITDA rose to $654 million from $593 million. Retail net sales increased to $2.442 billion from $2.375 billion, and Retail Adjusted EBITDA increased to $96 million from $88 million.
Cash and cash equivalents were $41 million at July 31, 2021, while total liquidity was approximately $1.32 billion, including $1.28 billion of unused ABL capacity. Working capital was $1.063 billion, down from $1.335 billion. UNFI had $2.175 billion of long-term debt, plus $13 million classified as current. The company was in compliance with its debt covenants and had not been subject to the ABL fixed-charge coverage covenant.
Material Changes Versus the Prior Comparable Period
- Fiscal 2021 benefited from continued elevated food-at-home demand associated with COVID-19, although growth and gross-margin benefits moderated from the initial pandemic period.
- Fiscal 2020 included $425 million of goodwill and asset impairment charges; no goodwill impairment charge was recorded in fiscal 2021.
- Operating expenses included a $63 million charge for withdrawal liabilities from three Retail multiemployer pension plans.
- Restructuring, acquisition and integration expenses declined to $56 million from $87 million, primarily reflecting lower integration and closed-property costs.
- Net interest expense increased to $204 million from $192 million, including a $30 million loss on debt extinguishment, despite lower interest expense on long-term debt.
- UNFI issued $500 million of 6.75% unsecured senior notes due October 2028 and used the proceeds, together with ABL borrowings, to prepay $500 million of term debt. Total Term Loan Facility prepayments during the year were $771 million.
- The company completed additional distribution-network investments, including Allentown, Pennsylvania, and incurred start-up and stabilization costs in certain facilities.
- Two Shoppers stores were reclassified from discontinued operations to continuing operations in the fourth quarter. Prior periods were revised to conform to the presentation.
Guidance, Outlook, Commentary and Risks
Management introduced the Fuel the Future strategy and ValuePath initiative. ValuePath savings are expected to be implemented through fiscal 2023, with a portion reinvested in market share, innovation, automation and competitive frontline wages. Management stated that free cash flow will be used to reduce debt and improve leverage.
Management expected fiscal 2022 capital expenditures of approximately $300 million, plus approximately $152 million to acquire the Riverside, California distribution-center property, with the latter expected to be funded through a concurrent sale-leaseback. Management also expected initial start-up costs and operating losses as the Allentown facility ramps up. Fiscal 2022 scheduled debt maturities were expected to be $14 million, and no excess-cash-flow prepayment was required based on the fiscal 2021 leverage ratio.
- COVID-19 could reduce food-at-home demand, disrupt facilities and suppliers, increase labor and safety costs, and create out-of-stocks and lower service levels.
- The company faces low industry margins, intense competition, retailer consolidation, pricing pressure, inflation or deflation, and customer self-distribution.
- Whole Foods concentration is material; loss or reduction of that business could significantly affect results.
- Labor shortages, wage inflation, union negotiations and potential work stoppages remain important operating risks. Approximately 11,000 employees, or 39% of the workforce, were covered by 48 collective bargaining agreements.
- Technology migrations, cybersecurity incidents and delays in warehouse-management and procurement-system implementations could impair operations and expected savings.
- Underfunded multiemployer pension plans create potential withdrawal liabilities. Recorded multiemployer withdrawal liabilities were $110 million at year-end, and additional material charges remain possible.
- Debt, lease and other contractual obligations constrain financial flexibility. The company also faces variable-rate exposure, LIBOR transition risk and refinancing risk.
- UNFI disclosed opioid-related litigation, prescription-pricing litigation and a False Claims Act matter. The Seventh Circuit affirmed dismissal of the False Claims Act case, although relators filed a rehearing petition. No material legal accrual was recorded for the disclosed proceedings.
- The Save-A-Lot services agreement generated $17 million of fiscal 2021 revenue and was expected to wind down around December 2021, creating a potential revenue and profit reduction.
Most Important Facts to Verify
- Whether post-pandemic food-at-home demand and elevated sales volumes persist without a material margin decline.
- Progress and realized savings from ValuePath, Fuel the Future, automation and distribution-center optimization.
- Debt repayment capacity, interest-rate exposure, refinancing needs and compliance with ABL and other debt covenants.
- The financial impact of the Riverside acquisition and sale-leaseback and the Allentown facility ramp-up.
- Potential additional multiemployer pension withdrawal liabilities and the status of collective bargaining agreements.
- Renewal, economics and customer concentration implications of the Whole Foods relationship.
- Outcomes and potential exposure from disclosed litigation, guarantees, customer credit risk and other contingencies.