United Natural Foods, Inc. — Fiscal 2024 First-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 operates Wholesale and Retail reportable segments, serves more than 30,000 customer locations and operates 79 retail grocery stores.
The filing covers the 13-week period ended October 28, 2023, compared with the 13-week period ended October 29, 2022. Fiscal 2024 contains 53 weeks, including a 14-week fourth quarter.
Financial performance and position
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Net sales | $7,552 million | $7,532 million | 0.3% |
| Gross profit | $1,030 million | $1,096 million | (6.0%) |
| Gross margin | 13.6% | 14.6% | (100 bps) |
| Operating income/(loss) | $(16) million | $99 million | $(115) million |
| Net income/(loss) attributable to UNFI | $(39) million | $66 million | $(105) million |
| Diluted EPS | $(0.67) | $1.07 | $(1.74) |
| Adjusted EBITDA | $117 million | $207 million | $(90) million |
| Cash flow from operations | $(254) million | $(262) million | $8 million improvement |
Operating loss margin was approximately 0.2%, compared with a 1.3% operating margin in the prior-year quarter. Net loss margin was approximately 0.5%, compared with a 0.9% net profit margin. Adjusted EBITDA margin declined to approximately 1.5% from 2.7%.
Wholesale sales increased $22 million to $7,281 million, while Wholesale Adjusted EBITDA declined $54 million to $117 million. Retail sales decreased $7 million to $606 million, and Retail Adjusted EBITDA declined from $20 million to a $1 million loss. Retail identical-store sales decreased 3.2% primarily because of lower volume.
At October 28, 2023, cash was $37 million, total assets were $7,848 million and working capital was approximately $1,380 million. Total debt was $2,301 million, including $1,152 million drawn under the ABL Credit Facility, $670 million under the Term Loan Facility and $500 million of Senior Notes. ABL availability was $2,550 million, with $1,248 million of unused credit after outstanding loans and letters of credit. Total liquidity was $1,285 million, including cash.
Material changes versus the prior comparable period
- Sales growth was limited to 0.3%; inflation and growth in the Supernatural channel were substantially offset by lower unit volumes and declines in Chains and Independent retailers.
- Gross profit fell $66 million and gross margin declined 100 basis points. Excluding LIFO charges, gross margin was 13.7% versus 14.8% in the prior year, primarily because decelerating inflation reduced procurement gains.
- Operating expenses increased 2.3% to $1,023 million, or 13.5% of sales, largely due to transformation investments, partly offset by lower transportation and distribution-center labor costs.
- Adjusted EBITDA decreased 43.5% to $117 million, driven primarily by weaker Wholesale gross profit and a Retail operating loss.
- Accounts receivable increased to $1,013 million from $889 million and inventories increased to $2,648 million from $2,292 million, reflecting seasonal working-capital needs. Debt increased $338 million from July 29, 2023, primarily through ABL borrowings.
- Cash used in operations remained significant at $254 million. Capital expenditures increased to $74 million from $67 million.
Guidance, outlook, commentary and risks
Management expects fiscal 2024 capital expenditures of approximately $400 million, focused on distribution-network automation, optimization and expansion and technology-platform investments. The filing does not provide clear full-year revenue, earnings or Adjusted EBITDA guidance.
Management is pursuing a transformation strategy focused on network automation and optimization, commercial value creation, digital offerings and infrastructure modernization. Near-term initiatives include administrative efficiencies, spending reprioritization, SKU optimization and commercial-contract reviews. Management expects to use available capital to reinvest in the business while reducing leverage over the long term.
Key risks include low and competitive margins, inflation and deflation, customer concentration and loss of significant customers, supplier relationships, labor shortages and union activity, supply-chain or distribution disruptions, technology implementation, food safety, fuel costs, consumer trading down and the possibility of additional asset impairments.
Unusual items included a $21 million non-cash impairment charge on a corporate-owned office location, $15 million of business-transformation costs, $5 million of losses on sold receivables and $4 million of restructuring, acquisition and integration expenses. The company also recorded a $7 million LIFO charge, compared with $21 million in the prior-year quarter.
UNFI contributed $13 million to multiemployer pension plans in the quarter and expects approximately $50 million of fiscal 2024 contributions. Potential withdrawal liabilities could become material if the company significantly reduces contributions or exits covered markets. Significant legal matters include opioid-related litigation, prescription-drug pricing claims and a False Claims Act action; no material legal accrual had been recorded as of October 28, 2023.
The company had $750 million of floating-rate debt covered by interest-rate swaps, with fixed rates ranging from 2.360% to 2.875% and maturities through October 2025. Management stated that debt covenants were satisfied and that the ABL fixed-charge coverage covenant had not been triggered.
Important facts for investors to verify
- Whether lower procurement gains and reduced gross margins persist as inflation moderates.
- Progress and realized savings from transformation, automation and technology investments.
- Seasonal working-capital requirements, ABL utilization and the company’s ability to reduce debt.
- Whether Retail sales volume and profitability recover after the 3.2% identical-store sales decline.
- Actual fiscal 2024 capital expenditures versus the approximately $400 million expectation.
- Developments and potential exposure in the False Claims Act, opioid-related and prescription-drug pricing litigation.
- Potential multiemployer pension contributions or withdrawal liabilities and any additional asset impairment charges.