United Natural Foods, Inc. (UNFI) — Fiscal 2023 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 filing covers the 13-week quarter ended January 28, 2023 and the 26-week year-to-date period, compared with the corresponding periods ended January 29, 2022. UNFI reported Wholesale and Retail segments and served more than 30,000 customer locations through 56 distribution centers and warehouses.
Key financial metrics
| Metric | Q2 FY2023 | Q2 FY2022 | YTD FY2023 | YTD FY2022 |
|---|---|---|---|---|
| Net sales | $7,816 million | $7,416 million | $15,348 million | $14,413 million |
| Gross profit | $1,069 million | $1,075 million | $2,165 million | $2,117 million |
| Gross margin | 13.7% | 14.5% | 14.1% | 14.7% |
| Operating income | $63 million | $125 million | $162 million | $232 million |
| Net income attributable to UNFI | $19 million | $66 million | $85 million | $142 million |
| Diluted EPS | $0.31 | $1.08 | $1.38 | $2.33 |
| Adjusted EBITDA | $181 million | $220 million | $388 million | $420 million |
| Net cash provided by operating activities | Not separately provided for the quarter | Not separately provided for the quarter | $270 million | $43 million |
Q2 gross margin declined primarily because decelerating inflation reduced procurement and inventory gains. Excluding non-cash LIFO charges, gross margin was 14.0% versus 14.8% in the prior-year quarter. The Q2 LIFO charge was $29 million versus $19 million; the year-to-date charge was $50 million versus $30 million.
At January 28, 2023, cash and cash equivalents were $40 million, total debt was $2,077 million, and total liquidity was $1,573 million, including $1,533 million of unused ABL credit availability. Total assets were $7,635 million and stockholders’ equity was $1,845 million. The company had $292 million of receivables serviced on behalf of a third-party financial institution after receivable sales.
Material changes versus the prior comparable period
- Q2 net sales increased 5.4%, while year-to-date sales increased 6.5%, primarily from inflation, new or expanded business and new customers; lower unit volumes partially offset growth.
- Wholesale Q2 sales increased 5.4% to $7,514 million, but Wholesale Adjusted EBITDA declined 22.2% to $137 million. Retail sales increased 2.6% to $660 million, while Retail Adjusted EBITDA declined 12.5% to $28 million.
- Operating expenses increased 6.1% in Q2 and 6.7% year to date. Operating income fell 49.6% in Q2 and 30.2% year to date.
- Net income attributable to UNFI declined $47 million in Q2 and $57 million year to date. The effective tax rate was 29.0% in Q2 versus 26.9% and 13.6% year to date versus 14.2%.
- Operating cash flow increased to $270 million year to date from $43 million, primarily because of $282 million of net proceeds from monetizing receivables.
- Capital expenditures increased to $151 million year to date from $106 million, primarily reflecting automation and technology investments.
- UNFI made a $125 million voluntary Term Loan prepayment using receivable monetization proceeds and reduced total debt by $46 million from July 30, 2022.
- UNFI repurchased approximately 729,000 shares for $29 million year to date, with $171 million remaining under the authorized repurchase program.
Guidance, outlook, commentary and risks
- Management expects fiscal 2023 capital expenditures of approximately $350 million, focused on distribution-network automation, optimization and expansion and technology platforms.
- Management expects to fund capital expenditures and debt maturities through operating cash flow and ABL borrowings and intends to continue reinvesting in the business while reducing debt over time.
- The transformation program focuses on network automation and optimization, commercial value creation, digital offerings, and infrastructure modernization. Management expects these initiatives to support long-term growth but is incurring business-transformation costs and may incur additional network-related expenses.
- Management estimated product-cost inflation at approximately 10% in Q2. Inflation remained unpredictable, while lower inflation and fewer vendor cost increases reduced procurement gains and pressured margins.
- Key risks include dependence on principal customers, low and inflation-sensitive margins, labor shortages and union activity, supply-chain and technology disruptions, competition and retail consolidation, customer losses, fuel and foreign-exchange volatility, food quality and safety, asset impairments, and execution of transformation initiatives.
- UNFI participates in multiemployer pension plans that management believes are generally underfunded. Fiscal 2023 contributions are expected to be approximately $51 million; a future withdrawal could create material liabilities.
- The company faces opioid-related litigation, a Minnesota prescription-pricing action and a False Claims Act matter for which the U.S. Supreme Court granted certiorari. No material legal accruals were recorded, but management states that outcomes and exposures could differ materially from current estimates.
- Guarantees had a maximum undiscounted exposure of $16 million, with a $1 million estimated loss recorded. The company also had approximately $562 million of non-cancelable purchase obligations and $755 million of future undiscounted lease payments for leases not yet commenced.
- UNFI was in compliance with its debt covenants and had not been subject to the ABL fixed-charge coverage covenant. Approximately $1,000 million of floating-rate notional debt was hedged with interest-rate swaps.
Important facts for investors to verify
- Whether margin pressure from lower procurement and inventory gains persists as inflation moderates.
- Whether the receivable-sale program is recurring and how its cash-flow benefit affects working-capital trends and leverage.
- Progress, costs, savings and execution risks associated with distribution automation and the broader transformation program.
- Wholesale and Retail Adjusted EBITDA trends relative to sales growth and the reconciliation of this non-GAAP measure to GAAP earnings.
- Ability to fund approximately $350 million of fiscal 2023 capital expenditures while reducing debt.
- Future interest-rate exposure as hedges mature between March 2023 and October 2025.
- Developments and potential financial exposure in the opioid, prescription-pricing and False Claims Act proceedings, as well as multiemployer pension plans.
- Customer concentration, unit-volume trends and the sustainability of sales growth driven by inflation and new business.