United Natural Foods, Inc. — Fiscal 2013 Third-Quarter Form 10-Q
Business context and reporting period
United Natural Foods, Inc. distributes natural, organic and specialty food and non-food products primarily in the United States and Canada. It operates wholesale, retail and manufacturing businesses, with wholesale as its only reportable segment. The filing covers the quarter and nine months ended April 27, 2013, compared with April 28, 2012. The financial statements are unaudited.
The company served more than 27,000 customer locations through 26 distribution centers totaling approximately 6.2 million square feet. Whole Foods Market represented approximately 37% of net sales in both the quarter and nine-month period.
Financial performance and key metrics
| Metric | Q3 FY2013 | Q3 FY2012 | 9M FY2013 | 9M FY2012 |
|---|---|---|---|---|
| Net sales | $1,566.2 million | $1,388.0 million | $4,422.0 million | $3,892.4 million |
| Gross profit | $263.0 million | $244.5 million | $740.6 million | $684.8 million |
| Gross margin | 16.8% | 17.6% | 16.7% | 17.6% |
| Operating income | $53.9 million | $48.6 million | $129.4 million | $112.2 million |
| Operating margin | 3.4% | 3.5% | 2.9% | 2.9% |
| Net income | $31.6 million | $29.0 million | $75.8 million | $66.2 million |
| Diluted EPS | $0.64 | $0.59 | $1.53 | $1.35 |
- Quarterly sales increased 12.8%; nine-month sales increased 13.6%.
- Quarterly net income increased approximately 8.9%; nine-month net income increased approximately 14.5%.
- Quarterly operating expenses rose 6.8% but declined to 13.4% of sales from 14.1%. Nine-month operating expenses rose 6.7% and declined to 13.8% of sales from 14.7%.
- Effective tax rates were 39.5% for the quarter and 37.3% for the nine months, compared with 39.4% for the comparable prior-year periods.
Cash flow, balance sheet, debt and liquidity
| Metric | April 27, 2013 | July 28, 2012 |
|---|---|---|
| Cash and cash equivalents | $13.9 million | $16.1 million |
| Working capital | $715.8 million | $612.7 million |
| Notes payable | $174.8 million | $115.0 million |
| Total debt, including current portion | $175.9 million | $116.0 million |
| Total assets | $1,751.5 million | $1,493.9 million |
| Stockholders’ equity | $1,062.8 million | $978.7 million |
- Net cash used in operating activities was $36.0 million for the first nine months, compared with $34.9 million used in the prior-year period. Working-capital investment included $143.6 million of inventory growth and $58.5 million of accounts-receivable growth.
- Net cash used in investing activities was $41.9 million, including $34.8 million of capital expenditures and $9.4 million for acquired businesses.
- Net cash provided by financing activities was $75.4 million, primarily reflecting $478.7 million of revolving-credit borrowings, $418.6 million of repayments and a $17.4 million increase in bank overdrafts.
- The $500 million revolving credit facility had a borrowing base of $484.9 million, $174.8 million of borrowings, and $34.1 million of letters of credit and reserves as of April 27, 2013. Remaining availability was $275.9 million.
- Management stated that cash on hand and available credit were sufficient for operations and planned capital expenditures over the following 12 months.
Material changes versus the prior comparable period
- Sales growth was driven by organic wholesale growth, increased conventional-supermarket activity, Whole Foods Market growth, approximately 1.8% food-price inflation in the quarter, and $12.5 million of acquisition-related quarterly sales. The acquisitions contributed $38.0 million of nine-month sales.
- Whole Foods Market sales increased approximately 16% in the quarter. Conventional-supermarket sales increased 13% in the quarter and 18% for the nine months.
- Gross margin declined because of customer-channel mix, greater private-label sales, lower inflation, higher inbound freight, reduced promotional opportunities and lower-margin produce brokerage activity.
- Operating income improved despite margin pressure, aided by sales growth, expense leverage and cost controls.
- Fiscal 2013 nine-month results included a $4.9 million pre-tax charge to settle a multi-state unclaimed-property audit and a $1.6 million impairment charge related to termination of a licensing agreement.
- Fiscal 2013 also included approximately $6.1 million of Auburn, Washington labor-action costs, $2.5 million of non-cash straight-line rent expense for the Denver-area facility and $11.0 million of share-based compensation.
- The company completed three distribution-business acquisitions during the first quarter for approximately $9.2 million in cash consideration, 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 continued growth concentrated in the lower-gross-margin supernatural-chain and conventional-supermarket channels.
- Management expected moderate food inflation of approximately 2% to 3% to continue over the next 12 months and anticipated operating-efficiency gains from the warehouse-management and procurement-system rollout.
- Management projected operating cash flow of $50 million to $100 million in each of fiscal 2013 and fiscal 2014 and planned to limit fiscal 2013 capital expenditures to approximately 1.3% of net sales.
- The company expected to install the upgraded warehouse-management system at its Auburn facility in the fourth quarter of fiscal 2013 and complete the broadline distribution-center rollout by the end of fiscal 2016.
- Principal risks include dependence on major customers, especially Whole Foods Market; lower margins from conventional and supernatural channels; economic and consumer-spending conditions; fuel-price volatility; inflation or deflation; supply-chain disruptions; system-implementation risk; acquisition execution; and capital-allocation decisions.
- Fixed-price fuel agreements covered approximately 5.2 million gallons of diesel through July 2013 at prices ranging from $3.33 to $3.99 per gallon.
- Management reported no material changes to previously disclosed risk factors, contractual obligations or market-risk exposures. Routine litigation was not expected to have a material adverse effect.
- Disclosure controls and procedures were deemed effective as of April 27, 2013, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether continued growth in Whole Foods Market and conventional-supermarket sales offsets the structurally lower gross margins of those channels.
- Inventory and receivables growth, operating cash conversion and the company’s ability to remain within its stated $50 million to $100 million operating-cash-flow outlook.
- Progress, costs and realized savings from the warehouse-management and procurement-system rollout.
- Utilization of the revolving credit facility, borrowing-base availability and compliance with the springing fixed-charge coverage covenant.
- The final valuation and contingent consideration associated with the three fiscal 2013 acquisitions.
- Potential recurrence of unusual costs, including audit settlements, labor-action costs, impairment charges and facility-related expenses.
- Customer concentration, particularly Whole Foods Market’s approximately 37% share of net sales, and the effect of any change in that relationship.