United Natural Foods, Inc. — Fiscal 2012 First-Quarter 10-Q
Reporting period: Three months ended October 29, 2011, compared with three months ended October 30, 2010. The unaudited filing covers the company’s wholesale distribution, retail, manufacturing and branded-product operations. United Natural Foods distributes natural, organic and specialty products primarily in the United States and Canada and served more than 23,000 customer locations.
Financial Performance and Position
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Net sales | $1,217.4 million | $1,053.0 million | +15.6% |
| Gross profit | $217.1 million | $192.3 million | +12.9% |
| Gross margin | 17.8% | 18.3% | Down 50 basis points |
| Operating income | $26.1 million | $29.7 million | Down 12.1% |
| Operating margin | 2.1% | 2.8% | Down 70 basis points |
| Net income | $15.2 million | $17.4 million | Down 12.9% |
| Diluted earnings per share | $0.31 | $0.39 | Down $0.08 |
| Net cash used in operations | $93.5 million | $32.9 million | Use increased $60.6 million |
- Operating expenses were $191.1 million, or 15.7% of sales, compared with $162.7 million, or approximately 15.5% of sales, in the prior-year quarter.
- Income before taxes was $25.0 million, and the effective tax rate was 39.4%, compared with 39.0% in the prior-year period.
- Cash and cash equivalents were $17.0 million at October 29, 2011, versus $16.9 million at July 30, 2011. Working capital was $405.7 million, up from $381.1 million.
- Accounts receivable were $309.5 million and inventories were $649.0 million at quarter-end, compared with $257.5 million and $514.5 million, respectively, at July 30, 2011.
- Total liabilities were $693.4 million and stockholders’ equity was $887.2 million at October 29, 2011.
- Capital expenditures were $7.8 million. Investing cash use was $7.6 million, while financing activities provided $101.2 million, primarily from $70.5 million of notes-payable borrowings and a $31.0 million increase in bank overdrafts.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected organic growth, higher sales to conventional supermarkets and Whole Foods Market, approximately $25.4 million of incremental sales from expanded Whole Foods distribution, and approximately 3.9% food-price inflation.
- Whole Foods Market represented approximately 36% of sales, up from 35%, with sales increasing approximately 18%. Conventional-supermarket sales increased approximately 18% and represented 23% of sales versus 22%.
- Approximately 58% of sales came from the lower-gross-margin conventional-supermarket and “supernatural” chain channels, compared with approximately 57% in the prior-year quarter. This mix shift reduced gross margin.
- Operating expenses included $5.3 million of severance and other costs related to the divestiture of conventional non-food and general-merchandise lines, $1.6 million of start-up costs for onboarding a new national customer, $0.3 million of severance for a former executive, and $0.6 million of bad-debt expense related to a customer bankruptcy.
- Gross profit was also affected by approximately $1.0 million of inventory write-offs and increased inbound-freight costs incurred to support holiday service levels.
- The company completed the divestiture of its conventional non-food and general-merchandise business, closed its Harrison, Arkansas facility, transferred specialty-food inventory, and classified $2.6 million of property and equipment as held for sale.
- Cash flow deteriorated primarily because inventory increased $135.4 million and accounts receivable increased $54.1 million, partly offset by a $52.5 million increase in accounts payable. Days in inventory rose to 53 from 51 at fiscal year-end.
Debt, Liquidity and Market Risk
- The company had a $400 million revolving credit facility maturing November 27, 2012. At October 29, 2011, borrowings were $185.5 million, letters of credit were $21.7 million, reserves were $1.3 million, and remaining availability was $191.6 million.
- A term loan had $45.9 million outstanding and matured July 28, 2012. The revolving facility and term loan required fixed-charge coverage ratios of 1.5-to-1.0 and 1.45-to-1.0, respectively; the company reported compliance at quarter-end.
- An interest-rate swap effectively fixed the rate on the hedged debt at 5.70% and had a fair-value liability of $0.9 million at October 29, 2011. The swap expires in July 2012.
- Fixed-price fuel agreements covered approximately 3.6 million gallons of diesel fuel through July 2012 at prices ranging from $3.56 to $3.90 per gallon.
Guidance, Outlook, Commentary and Risks
- Management expected fiscal 2012 sales to grow from fiscal 2011, supported by new customers, expanded product sales to existing customers, continued Whole Foods distribution, conventional-supermarket growth and food-price inflation.
- Management expected most growth to come from lower-gross-margin supernatural and conventional-supermarket channels and intended to offset margin pressure through supply-chain efficiencies, warehouse-management and procurement-system improvements, and IT investments.
- The warehouse-management and procurement system was expected to be rolled out to all distribution centers by the end of fiscal 2014.
- Management expected moderate inflation of approximately 2% to 4% to continue over the next 12 to 24 months and estimated fiscal 2012 capital requirements of $47 million to $52 million.
- Management expected average annual operating cash flow of $75 million to $110 million for fiscal 2012 and fiscal 2013 and believed available cash and credit capacity were sufficient for operations and planned capital expenditures over the next twelve months.
- Key risks include dependence on major customers, particularly Whole Foods Market; lower margins from conventional-supermarket growth; economic and consumer-spending conditions; inflation and fuel costs; execution of the warehouse-management system rollout; customer credit losses; acquisitions; and capital-allocation decisions.
- The filing states that routine litigation was not expected to have a material adverse effect, that there were no material changes to previously disclosed risk factors or contractual obligations, and that disclosure controls were effective.
Investor Verification Points
- Verify whether the substantial first-quarter inventory build and negative operating cash flow normalized after the holiday season and new-customer onboarding.
- Assess whether lower gross margins in the Whole Foods and conventional-supermarket channels are being offset by operating efficiencies.
- Review refinancing or repayment plans for the revolving facility and term loan maturities in 2012.
- Monitor Whole Foods concentration, which accounted for approximately 36% of quarterly sales.
- Confirm the financial impact and completion proceeds of the divestiture and sale of the Harrison, Arkansas assets.
- Track execution of the warehouse-management and procurement-system rollout and related implementation costs.