United Natural Foods, Inc. — Fiscal 2024 Second-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 company serves more than 30,000 customer locations through 55 distribution centers and also operates retail grocery stores and pharmacies.
The filing covers the 13-week quarter ended January 27, 2024, compared with the 13-week quarter ended January 28, 2023, and the 26-week year-to-date periods. Fiscal 2024 contains 53 weeks.
Financial performance and liquidity
| Metric | Q2 FY2024 | Q2 FY2023 | 26-week FY2024 | 26-week FY2023 |
|---|---|---|---|---|
| Net sales | $7,775 million | $7,816 million | $15,327 million | $15,348 million |
| Gross profit | $1,035 million | $1,069 million | $2,065 million | $2,165 million |
| Gross margin | 13.3% | 13.7% | 13.5% | 14.1% |
| Operating income | $16 million | $63 million | Approximately $0 million | $162 million |
| Net income attributable to UNFI | $(15) million | $19 million | $(54) million | $85 million |
| Diluted earnings per share | $(0.25) | $0.31 | $(0.92) | $1.38 |
| Adjusted EBITDA | $128 million | $181 million | $245 million | $388 million |
| Net cash from operating activities | Not separately presented for the quarter | $(71) million | $270 million |
Q2 gross profit declined 3.2%, and gross margin fell 40 basis points. Excluding non-cash LIFO charges, gross margin was 13.4% versus 14.0% in the prior-year quarter. Management attributed the decline primarily to lower procurement gains as inflation decelerated.
Operating expenses increased 0.8% in Q2 to $1,010 million, or 13.0% of sales, reflecting transformation investments partly offset by lower transportation and distribution-center labor costs. Q2 interest expense increased to $40 million from $39 million, primarily because of higher average interest rates.
Cash used in operations was $71 million year to date, compared with $270 million of cash provided in the prior-year period. Investing cash use was $142 million, including $141 million of capital expenditures. Financing activities provided $210 million, primarily through net borrowings under the revolving credit facility.
At January 27, 2024, cash was $34 million, total debt was $2,180 million, and total liquidity was $1,430 million, consisting of $34 million of cash and $1,396 million of unused ABL capacity. Working capital was $1,245 million. Debt increased $217 million from July 29, 2023, primarily to fund higher working capital needs. The ABL facility had $2,600 million of total availability, $1,054 million of borrowings and $150 million of outstanding letters of credit.
Material changes versus the prior comparable period
- Sales decreased 0.5% in Q2 and 0.1% year to date, primarily due to lower unit volumes. The Supernatural channel increased 5.5% in Q2 and 6.0% year to date, partially offsetting declines in chains and independent retailers.
- Retail sales declined 4.4% in Q2 and 2.8% year to date; identical-store sales decreased 4.8% and 4.0%, respectively.
- Wholesale Adjusted EBITDA declined 13.9% in Q2 and 23.7% year to date. Retail Adjusted EBITDA declined 71.4% in Q2 and 85.4% year to date.
- Consolidated Adjusted EBITDA fell $53 million in Q2 and $143 million year to date.
- Year-to-date loss on sale of assets and other asset charges was $24 million versus a $4 million gain in the prior-year period, including a $21 million non-cash impairment charge on a corporate-owned office location.
- The company recognized a $205 million right-of-use asset and corresponding operating lease liability after commencing development of a new approximately 1.3-million-square-foot distribution center in Manchester, Pennsylvania.
- Capital expenditures were $141 million year to date versus $151 million, while cloud technology implementation spending increased to $17 million from $3 million.
Guidance, outlook, commentary and risks
Management expects fiscal 2024 capital and cloud implementation spending of approximately $400 million. It expects to fund spending and debt maturities through internally generated funds and ABL borrowings, while pursuing transformation initiatives focused on network automation, commercial value creation, digital capabilities and infrastructure modernization. Management also intends to improve leverage and reduce debt over the long term.
Management reported approximately 2% product-cost inflation in Q2, but fewer and less significant vendor cost increases than in the prior-year period. The filing does not provide a clear consolidated earnings or revenue guidance range.
Key risks include low and competition-sensitive margins, customer concentration, declining volumes, inflation and deflation, labor shortages and union activity, supply-chain or distribution disruptions, fuel-cost volatility, dependence on technology implementations, access to capital, potential asset impairments, pension and multiemployer-plan obligations, and changes in supplier or customer relationships.
UNFI reported approximately 43 opioid-related lawsuits in multidistrict litigation, a Minnesota prescription-pricing lawsuit with a July 2025 trial date, and a False Claims Act matter with trial scheduled for September 30, 2024. No material accrual was recorded for these legal proceedings, and management states that outcomes could materially affect financial condition, results of operations or cash flows.
The company remained in compliance with its debt covenants and had not been subject to the ABL fixed-charge coverage covenant through the filing date. It had $850 million of floating-rate notional debt covered by interest-rate swaps, with maturities from March 2024 through June 2027.
On March 1, 2024, after the quarter-end, UNFI agreed to pay former executive Michael C. Stigers $900,000 under a settlement related to a change-in-control agreement.
Important facts for investors to verify
- Whether lower procurement gains and weaker volumes persist and further pressure gross margin and Adjusted EBITDA.
- The pace and returns of transformation, automation and technology investments, including the Manchester distribution center.
- Working-capital requirements, operating cash generation and reliance on additional ABL borrowings.
- Debt refinancing and repayment requirements, including the $645 million term loan maturing in 2026 and variable-rate exposure.
- Progress in Retail operations and recovery of comparable-store sales.
- Potential exposure from the False Claims Act, opioid-related and prescription-pricing litigation, despite no material accrual.
- The impact of the $21 million asset impairment, business transformation costs and other adjustments excluded from Adjusted EBITDA.
- The company’s ability to fund approximately $400 million of fiscal 2024 capital and cloud implementation expenditures while reducing leverage.