United Natural Foods, Inc. — Form 10-Q Summary
Business Context and Reporting Period
United Natural Foods, Inc. distributes and retails natural, organic and specialty products in the United States and Canada. The filing covers the three and six months ended February 1, 2014, compared with January 26, 2013. The company operated 28 distribution centers, approximately 6.6 million square feet of warehouse capacity, 13 Earth Origins Market stores, and served more than 31,000 customer locations. Wholesale was the only reportable segment.
Financial Results and Key Metrics
| Metric | Three Months Ended February 1, 2014 | Prior Comparable Period | Six Months Ended February 1, 2014 | Prior Comparable Period |
|---|---|---|---|---|
| Net sales | $1.646 billion | $1.446 billion | $3.248 billion | $2.856 billion |
| Gross profit | $268.2 million | $241.7 million | $539.3 million | $477.6 million |
| Gross margin | 16.3% | 16.7% | 16.6% | 16.7% |
| Operating income | $48.8 million | $39.0 million | $96.9 million | $75.5 million |
| Operating margin | 3.0% | 2.7% | 3.0% | 2.6% |
| Net income | $28.0 million | $22.6 million | $55.7 million | $44.2 million |
| Diluted EPS | $0.56 | $0.46 | $1.12 | $0.89 |
- Six-month effective tax rate was 40.0%, compared with 35.6% in the prior period; the prior period benefited from discrete tax items and a solar tax credit.
- Six-month net cash used in operating activities was $35.8 million, compared with $48.6 million used in the prior period.
- Six-month capital expenditures were $76.3 million, compared with $20.0 million in the prior period; acquisition spending was $23.0 million.
- Cash and cash equivalents were $14.6 million at February 1, 2014, compared with $11.1 million at August 3, 2013.
- Working capital was $817.8 million, up $100.8 million from fiscal year-end, primarily reflecting higher receivables and inventories.
- Revolving credit borrowings were $240.2 million. The borrowing base was $482.8 million, with $36.6 million of letters of credit and reserves and $206.0 million of remaining availability.
- Total liabilities were $791.8 million and stockholders’ equity was $1.159 billion at February 1, 2014. Long-term debt, including the current portion, was $34.3 million.
Material Changes Versus the Prior Comparable Period
- Quarterly sales increased 13.9% and six-month sales increased 13.7%, driven by organic wholesale growth, food-price inflation, broader product offerings, and the Trudeau Foods acquisition.
- Quarterly operating income rose 25.3%; six-month operating income rose 28.2%. Operating expense leverage more than offset the decline in gross margin.
- Gross margin declined because of customer-channel mix, reduced promotional activity, higher inbound freight, weather-related spoilage, and Canadian foreign-exchange pressures.
- Sales growth continued to shift toward lower-gross-margin supernatural chains and conventional supermarkets. These channels represented approximately 63% of quarterly sales and 62% of six-month sales.
- Whole Foods Market represented approximately 37% of quarterly sales and 36% of six-month sales. Its distribution agreement expires September 25, 2020.
- The company acquired Trudeau Foods on September 26, 2013, for approximately $23.0 million in cash. Trudeau contributed approximately $18.7 million of quarterly sales and $26.3 million of six-month sales.
- Prior-year results included a $4.9 million unclaimed-property settlement charge, a $1.6 million intangible-asset impairment, and approximately $4.6 million of labor-action costs. These items did not recur in the current six-month period.
Guidance, Outlook, Risks, and Unusual Items
- Management expects fiscal 2014 sales to exceed comparable fiscal 2013 periods, with continued growth in supernatural and conventional supermarket channels. No specific revenue or earnings guidance was provided.
- Management expects moderate food inflation of approximately 2% to 3% over the next 12 months and believes it will generally be passed through the supply chain.
- The company expects $50 million to $100 million of operating cash flow in each of fiscal 2014 and fiscal 2015 and plans fiscal 2014 capital expenditures of approximately 2.2% to 2.4% of sales.
- Management expects to complete the national warehouse management and procurement system rollout across existing broadline facilities by the end of fiscal 2017.
- New distribution facilities in Wisconsin and New York were under construction, with planned operations in spring and summer 2014, respectively. Capital projects and acquisitions are expected to be funded with operating cash flow, revolver borrowings, mortgages, or sale-leaseback transactions.
- Fixed-price fuel agreements covered approximately 8.5 million gallons of diesel through December 2014 at prices ranging from $3.17 to $4.00 per gallon.
- Key risks include customer concentration, particularly Whole Foods Market; low operating margins; economic and consumer-spending sensitivity; lower margins from supermarket-channel expansion; fuel costs; inflation or deflation; supply-chain disruption; labor issues; execution of warehouse and transportation systems; acquisition integration; and capital-allocation decisions.
- The company reported no material changes to previously disclosed contractual obligations or risk factors. Routine litigation was not expected to have a material adverse effect. Management concluded that disclosure controls were effective.
Investor Verification Checklist
- Verify the sustainability of sales growth after separating organic growth, food inflation, acquisitions, and customer concentration.
- Monitor gross-margin pressure from Whole Foods Market and conventional supermarket growth, including the company’s ability to offset it through operating efficiencies.
- Assess working-capital needs, particularly inventory and receivables, given that operations used cash during the first six months.
- Reconcile capital spending, facility construction schedules, acquisition activity, and rising revolver borrowings with expected operating cash flow.
- Review the terms and covenant triggers of the $500 million revolving credit facility and confirm the reported $206.0 million availability.
- Evaluate exposure to Whole Foods Market, Canadian foreign-exchange movements, diesel fuel prices, weather-related costs, and supply-chain execution.