United Natural Foods, Inc. — Form 10-Q Summary
Business context and reporting period
United Natural Foods, Inc. is a distributor and retailer of natural, organic and specialty products serving the United States and Canada. The filing covers the first quarter of fiscal 2013, ended October 27, 2012, compared with the quarter ended October 29, 2011. The company operated 26 distribution centers totaling approximately 6.2 million square feet and served more than 27,000 customer locations. Wholesale was the only reportable segment.
Financial performance and liquidity
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net sales | $1.410 billion | $1.217 billion | 15.8% increase |
| Gross profit | $236.0 million | $217.1 million | 8.7% increase |
| Gross margin | 16.7% | 17.8% | Down 110 basis points |
| Operating income | $36.6 million | $26.1 million | 40.3% increase |
| Operating margin | 2.6% | 2.1% | Up 50 basis points |
| Net income | $21.5 million | $15.2 million | 42.1% increase |
| Diluted EPS | $0.43 | $0.31 | Increase of $0.12 |
| Net cash used in operations | $55.5 million | $93.5 million | $38.0 million improvement |
Sales growth was driven by organic wholesale growth, Whole Foods Market, conventional supermarkets, approximately $11.2 million of acquired-business sales, and approximately 2.2% food-price inflation. Whole Foods Market represented approximately 36% of sales. Conventional supermarket sales increased 26% and represented approximately 25% of sales, versus 23% in the prior-year quarter.
Gross margin declined because of fewer forward-buying transactions, lower backhaul volumes during the initial transportation-routing software rollout, higher fuel costs, customer and product mix shifts, and higher shrink. Operating expenses declined to 14.1% of sales from 15.7%, reflecting scale, expense controls, lower restructuring costs, and the divestiture of conventional non-food and general merchandise operations.
Cash and cash equivalents were $8.9 million at October 27, 2012, compared with $16.1 million at July 28, 2012. Inventory increased to $719.7 million from $578.6 million, primarily from sales growth and holiday inventory buildup. Working capital was $659.2 million, up from $612.7 million at fiscal year-end.
Capital expenditures were $4.6 million and acquisitions used $9.2 million of cash. Financing activities provided $62.3 million, including $34.0 million of borrowings under notes payable and a $30.4 million increase in bank overdrafts. The company had $148.9 million outstanding under its $500 million revolving credit facility, $34.1 million of letters of credit and reserves, and approximately $301.7 million of remaining availability. The facility matures May 24, 2017.
Material changes versus the prior comparable period
- Net sales increased $192.6 million, led by Whole Foods Market and conventional supermarket growth.
- Gross margin fell 1.1 percentage points as lower-margin channels expanded and distribution and fuel costs increased.
- Operating income improved despite lower gross margin because operating expenses grew only 4.4% and restructuring and impairment expenses declined by $3.7 million.
- Other expense increased to $5.6 million from $1.0 million, primarily because of a $4.9 million charge related to an agreement in principle to settle a multi-state unclaimed property audit.
- The effective tax rate decreased to 30.5% from 39.4%, including a $2.9 million net discrete tax benefit, principally from the reversal of uncertain tax positions. Excluding these items, management estimated an annual effective rate of approximately 39.8%.
- The company acquired assets of three distributors for approximately $9.2 million in cash, with potential contingent consideration of up to $3.7 million through February 2017.
Guidance, outlook, risks, and unusual items
Management expected fiscal 2013 sales to exceed fiscal 2012 sales, with growth concentrated in the lower-gross-margin supernatural and conventional supermarket channels. Management expected moderate food inflation of approximately 2% to 4% to continue over the next 12 months and projected average operating cash flow of $70 million to $100 million in each of fiscal 2013 and fiscal 2014. Fiscal 2013 capital expenditures were expected to be no more than approximately 1.3% of net sales.
The company expected to continue rolling out its national warehouse management and procurement system, with completion across distribution centers targeted by the end of fiscal 2015. Management stated that cash on hand and available revolving-credit capacity should fund operations and planned capital expenditures over the next twelve months.
Key risks include dependence on principal customers, particularly Whole Foods Market; lower margins from conventional supermarket growth; economic and consumer-spending conditions; inflation and fuel costs; supply-chain disruptions; execution of the warehouse-management-system rollout; acquisition integration and availability; and capital-allocation decisions. The company had fixed-price agreements covering approximately 4.3 million gallons of diesel fuel through July 2013 at prices ranging from $3.33 to $3.91 per gallon.
The filing also reports a $1.6 million impairment of an intangible asset following termination of a licensing agreement. Routine litigation was not expected to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the substantial customer concentration, including Whole Foods Market at approximately 36% of sales, creates material revenue or bargaining risk.
- Whether lower gross margins in supermarket channels can be offset by operating efficiencies and the warehouse-management-system rollout.
- Whether working-capital requirements, particularly inventory buildup, permit management’s projected operating cash flow of $70 million to $100 million annually.
- The final amount and timing of payment for the multi-state unclaimed property settlement.
- The final valuation and contingent consideration associated with the three distributor acquisitions.
- Progress, costs, and execution risks related to planned distribution-center expansions and the fiscal 2015 systems rollout.