United Natural Foods, Inc. — Q3 Fiscal 2017 Form 10-Q
Reporting period: 13 weeks and 39 weeks ended April 29, 2017, compared with April 30, 2016. The company distributes natural, organic and specialty products in the United States and Canada through its wholesale, retail, manufacturing, branded-products and brokerage operations.
Financial performance and position
| Metric | Q3 FY2017 | Q3 FY2016 | Change |
|---|
| Net sales | $2.370 billion | $2.132 billion | +11.1% |
| Gross profit | $366.4 million | $322.4 million | +13.6% |
| Gross margin | 15.46% | 15.12% | +34 basis points |
| Operating income | $64.9 million | $66.0 million | -1.6% |
| Operating margin | 2.74% | 3.10% | Down 36 basis points |
| Net income | $36.6 million | $38.3 million | -4.4% |
| Diluted EPS | $0.72 | $0.76 | Down $0.04 |
| Metric | 39 Weeks FY2017 | 39 Weeks FY2016 | Change |
|---|
| Net sales | $6.933 billion | $6.256 billion | +10.8% |
| Gross profit | $1.060 billion | $933.9 million | +13.5% |
| Gross margin | 15.29% | 14.93% | +36 basis points |
| Operating income | $164.6 million | $161.6 million | +1.8% |
| Operating margin | 2.37% | 2.58% | Down 21 basis points |
| Net income | $91.3 million | $91.1 million | Essentially flat |
| Diluted EPS | $1.80 | $1.81 | Down $0.01 |
- Cash flow: Operating cash flow was $163.1 million for the first 39 weeks, down from $205.6 million. The decline primarily reflected higher accounts receivable and inventory balances, partly offset by higher accounts payable.
- Investing: Cash used in investing was $51.2 million, including $40.0 million of capital expenditures and $9.2 million for acquired businesses.
- Financing: Cash used in financing was $114.2 million, principally reflecting $276.4 million of revolving-credit repayments and $8.5 million of long-term debt repayments, partly offset by $154.4 million of revolving borrowings.
- Cash and liquidity: Cash and cash equivalents were $16.1 million at April 29, 2017, compared with $18.6 million at July 30, 2016. Revolver availability was $542.9 million after $304.2 million of borrowings and $35.8 million of letters of credit.
- Debt: Total debt consisted of $304.2 million under the revolving facility, $121.0 million under the term loan, and other long-term obligations. Long-term debt, including the current portion, had a carrying value of $164.9 million. The company was in compliance with its term-loan covenants and was not subject to the springing revolver fixed-charge coverage covenant during the quarter.
- Balance sheet: Total assets were $2.921 billion and stockholders’ equity was $1.629 billion. Inventories were $1.042 billion and accounts payable were $547.0 million.
Material changes versus the prior comparable period
- Sales growth was primarily acquisition-driven, including Haddon House, Nor-Cal Produce, Global Organic and Gourmet Guru. Sales were also affected by broad-based food-retail softness, business rationalization, limited inflation and product-mix changes.
- Conventional supermarket sales increased 28% in Q3 and represented 28% of sales versus 25% in the prior year. Sales to Whole Foods Market increased approximately 5%, but its share of total sales declined to 34% from 36%.
- Gross margin improved because of acquisitions and margin initiatives, but operating expenses grew faster than sales. Higher acquired-business costs, integration expenses, depreciation and amortization, health-care costs and stock compensation reduced operating leverage.
- Q3 included $3.9 million of restructuring and asset-impairment expense, primarily workforce reductions and facility-closing costs. The company recorded $18.7 million of share-based compensation during the first 39 weeks, compared with $12.7 million.
- Working capital declined to $984.1 million from $991.5 million at July 30, 2016. Days in inventory improved to 46 from 49, while days sales outstanding remained 20.
Guidance, outlook, risks and unusual items
- Management expected fiscal 2017 sales to exceed the comparable prior-year period, with growth from acquisitions, new customers and additional products sold to existing customers. The filing does not provide a specific consolidated sales or earnings guidance range.
- Management targeted fiscal 2017 capital expenditures of approximately 0.5% to 0.6% of net sales and expected to fund operations, capital expenditures, working capital and acquisitions through operating cash flow and revolver borrowings.
- The restructuring program was extended after quarter-end. Management expected additional pretax restructuring charges of $3.0 million to $4.0 million in Q4 and total fiscal 2017 charges of $6.9 million to $7.9 million, including $3.9 million incurred in Q3.
- The company planned to open a shared services center and continue warehouse-management-system implementation, with rollout to all existing U.S. broadline facilities expected by the end of fiscal 2018.
- On May 24, 2017, the company sold its stake in Kicking Horse Coffee and expected to recognize a pretax gain of $6.1 million in Q4.
- Key risks include customer concentration, especially Whole Foods Market; lower margins in conventional and supernatural channels; acquisition retention and integration; competition and retailer self-distribution; supply-chain disruptions; fuel and foreign-exchange volatility; labor costs; technology implementation; and execution of cost-saving initiatives.
- There were no pending material legal proceedings, no material changes to previously disclosed risk factors, and management concluded that disclosure controls were effective.
Important facts for investors to verify
- Whether acquisition-related revenue growth can continue while acquired businesses’ higher cost to serve is reduced.
- Progress and actual costs of the restructuring program, shared services center and warehouse-management-system rollout.
- Operating-margin recovery, particularly given competitive pricing, limited inflation and lower-margin conventional supermarket growth.
- Accounts receivable, inventory and accounts payable trends underlying operating cash flow.
- Revolver availability, covenant headroom and debt reduction following acquisition financing.
- The sustainability of Whole Foods Market sales and the company’s concentration in that customer.
- Recognition and timing of the expected $6.1 million Kicking Horse Coffee gain in Q4 fiscal 2017.
