United Natural Foods, Inc. 10-Q Summary
Business context and reporting period
United Natural Foods, Inc. distributes and retails natural, organic and specialty food and non-food products in the United States and Canada. The filing covers the unaudited three months ended November 2, 2013, compared with the three months ended October 27, 2012. The wholesale business is the only reportable segment; other operations include retail, manufacturing and corporate activities.
Key financial metrics
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net sales | $1,602.0 million | $1,410.0 million | 13.6% increase |
| Gross profit | $271.2 million | $236.0 million | 14.9% increase |
| Gross margin | 16.9% | 16.7% | 20 basis-point increase |
| Operating income | $48.0 million | $36.6 million | 31.3% increase |
| Operating margin | 3.0% | 2.6% | 40 basis-point increase |
| Net income | $27.8 million | $21.5 million | 28.9% increase |
| Diluted earnings per share | $0.56 | $0.43 | Increase |
| Net cash used in operating activities | $(49.7) million | $(55.5) million | $5.8 million improvement |
Cost of sales was 83.1% of sales versus 83.3% in the prior-year quarter. Operating expenses were $223.2 million, or 13.9% of sales, versus $199.4 million, or 14.1%. The effective tax rate was 40.0%, compared with 30.5%, primarily because the prior-year quarter included a favorable $2.7 million discrete tax item. Interest expense increased to $1.9 million from $1.0 million.
At November 2, 2013, cash and cash equivalents were $9.4 million, total assets were $2.0 billion, and working capital was $807.5 million. Accounts receivable were $398.2 million and inventories were $838.4 million. Total liabilities were $829.4 million and stockholders’ equity was $1.13 billion.
Revolving-credit borrowings were $228.1 million, with $36.7 million of letters of credit and reserves. The borrowing base was $486.2 million and remaining availability was $221.4 million. Long-term debt, including the current portion, was $34.6 million. The company was not subject to its springing fixed-charge coverage covenant during the quarter.
Investing cash outflows were $56.1 million, including $33.2 million of capital expenditures and $23.0 million for acquisitions. Financing activities provided $104.2 million, principally from net borrowings under the revolving credit facility. Cash declined by $1.8 million to $9.4 million.
Material changes versus the prior comparable period
- Sales growth reflected higher wholesale sales, particularly to Whole Foods Market and conventional supermarkets, approximately 2.0% food-price inflation, and $7.6 million of sales from the Trudeau Foods acquisition.
- Whole Foods Market represented approximately 36% of sales in both periods; sales to that customer increased approximately 13%.
- Conventional-supermarket sales increased approximately 17% and remained approximately 25% of total sales.
- Gross margin improved from 16.7% to 16.9%, primarily from inventory-demand planning and lower freight expense as a percentage of sales.
- Operating expenses increased in dollars because of higher sales volume but declined as a percentage of sales. The prior-year period included a $1.6 million intangible-asset impairment and approximately $1.0 million of labor-action costs.
- Other expense declined to $1.8 million from $5.6 million because the prior-year period included a $4.9 million charge related to a multi-state unclaimed-property audit.
- Inventory increased to $838.4 million from $702.2 million at August 3, 2013, reflecting increased holiday-season buying. Days in inventory increased to 53 from 52.
- The company acquired Trudeau Foods on September 26, 2013, for approximately $23.0 million in cash. The acquired business contributed approximately $7.6 million of quarterly sales.
Guidance, outlook, risks and unusual items
Management expected fiscal 2014 sales to grow over fiscal 2013, with growth concentrated in the lower-gross-margin supernatural-chain and conventional-supermarket channels. Management expected moderate food-price inflation of approximately 2% to 3% over the next 12 months and projected operating cash flow of $50 million to $100 million in each of fiscal 2014 and fiscal 2015.
Fiscal 2014 capital expenditures were expected to be approximately 2.2% to 2.4% of sales, reflecting construction of distribution centers in New York and Wisconsin. The company expected to begin operations at its Sturtevant, Wisconsin facility in spring 2014 and complete its national warehouse-management and procurement-system rollout by the end of fiscal 2017.
Key risks include customer concentration, particularly Whole Foods Market; low operating margins; lower margins from growth in conventional supermarkets; economic and consumer-spending conditions; fuel prices; inflation and deflation; supply-chain disruptions; execution of warehouse and transportation systems; labor relations; acquisition integration; and capital-allocation decisions. The company had fixed-price agreements covering approximately 8.5 million gallons of diesel fuel through December 2014, at prices ranging from $3.17 to $4.00 per gallon.
The filing reports no material changes to previously disclosed contractual obligations or risk factors, no material adverse litigation matters, and effective disclosure controls. The filing text does not provide a separate full-year earnings or margin forecast.
Important facts for investors to verify
- Whether continued sales growth from Whole Foods Market and conventional supermarkets offsets their structurally lower gross margins.
- Whether supply-chain initiatives and the warehouse-management rollout produce the expected operating-expense leverage.
- Inventory growth, working-capital needs and the company’s ability to generate the projected $50 million to $100 million of annual operating cash flow.
- Revolving-credit utilization, remaining availability, interest-rate exposure and compliance with the springing fixed-charge coverage covenant.
- Integration and performance of Trudeau Foods and the returns from planned distribution-center construction.
- Exposure to diesel-price movements under fixed-price fuel agreements and to customer concentration involving Whole Foods Market.