United Natural Foods Q2 Earnings Call Highlights
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Gross margin: 13.2%, up 10 basis points year-over-year, driven by optimization benefits and modestly higher procurement gains, partially offset by a lower retail margin rate tied in part to pharmacy product mix shifts.
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Operating expenses: down nearly 6% year-over-year, with operating expense rate improving 40 basis points to 12.2% of net sales.
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Distribution center productivity: up more than 6%, supported by network optimization, automation, Value Delivery Office projects, and expanded lean daily management practices.
Segment trends: natural growth offsets conventional and retail declines
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Within wholesale, Tarditi said natural product sales grew 7% and “outperformed the market,” citing continued demand for natural, organic, and specialty products and strong execution by customers. He noted the business also benefited from short-term project work, portions of which are expected to wind down in the second half of fiscal 2024.
Conventional product sales declined 12%, which management again tied primarily to strategic network optimization, including the planned exit from the Allentown distribution center. In response to questions, management emphasized that optimization impacts are more pronounced in conventional and that Allentown was exited faster than anticipated, which pulled forward some benefits.
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Retail sales fell 8%, which was largely driven by strategic store closures aimed at optimizing the footprint. Same-store sales improved sequentially, declining 2% in the quarter compared with a 3% decline in the prior quarter. Douglas reiterated that the company remains focused on improving Cub’s value proposition, assortment, and shopping experience in the Minneapolis market.
Operational initiatives: Relex rollout, lean practices, and private brand expansion
Douglas highlighted the company’s supply chain modernization efforts, including the rollout of Relex, an AI-powered supply chain planning platform. He said roughly another dozen distribution centers were expected to go live the following week, with implementation expected to be completed by fiscal year-end. Management said Relex is improving customer service, fill rates, and inventory management, supporting free cash flow improvement.
On productivity, Tarditi said lean daily management had been implemented in 36 distribution centers as of the end of the quarter, up two sequentially. He said the company conducted 12 process improvement workshops during the quarter, targeting areas such as seasonal item buying, new customer onboarding time, and out-of-stock rates. Since the prior year quarter, management said shrink has been reduced by more than 11%, while throughput and on-time deliveries have each increased nearly 7%.
Douglas also pointed to private brand momentum, noting that UNFI has launched nearly 50 new private label SKUs fiscal year to date. He said early adoption has been encouraging and added that management expects the private brands portfolio to grow faster than the total business, supported by a focus on innovation and “good, better, best” positioning.
Cash flow, deleveraging, and capital allocation
UNFI posted quarterly free cash flow of $243 million, up $50 million year-over-year. Tarditi said the quarter’s free cash flow performance, along with higher adjusted EBITDA, helped reduce net debt to its lowest level since fiscal 2018 and lowered net leverage to 2.7x, representing a half-turn sequential improvement and a full-turn improvement year-over-year.
The company also repurchased nearly 750,000 shares for approximately $25 million at an average price of $33.66. Tarditi said debt reduction remains the top priority, but the repurchases reflected management’s conviction in long-term value creation and a desire to remain flexible for deleveraging, organic investment, and opportunistic buybacks.
After the quarter ended, UNFI made a voluntary $115 million prepayment on senior notes at par, reducing the 2028 maturity balance to $385 million. Management said this is expected to reduce annualized net interest expense by more than $2 million.
Updated fiscal 2024 outlook: lower sales, higher EBITDA, EPS, and free cash flow
Based on year-to-date results and the forecast for the balance of the year, UNFI lowered its full-year sales outlook to a range of $31.0 billion to $31.4 billion, which management said reflects optimization work ahead of schedule and some deceleration in food retail sales trends. Tarditi said the new business pipeline is “strong,” but those opportunities are expected to contribute more meaningfully to next fiscal year sales.
At the same time, the company raised profitability and cash flow expectations:
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Adjusted EBITDA: $680 million to $710 million (up $30 million at the midpoint)
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Adjusted EPS: $2.30 to $2.70 per share
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Capital spending: maintained at $250 million, with higher second-half investment expected for projects including ERP implementation and automation
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Free cash flow: increased to approximately $330 million for the full year
Management said the higher adjusted EBITDA and free cash flow outlook supports further deleveraging, with year-end net leverage now expected to be around 2.3x, below the prior target of 2.5x.
In Q&A, executives said they view potential SNAP-related impacts as manageable and embedded in the outlook, and described fuel cost increases as manageable due to a combination of hedges and contractual fuel surcharge mechanisms. Douglas closed the call by reiterating the company’s focus on executing its strategy, building capabilities, and pursuing continued improvement opportunities as UNFI marks its 50th anniversary.
About United Natural Foods (NYSE:UNFI)
United Natural Foods, Inc (NYSE: UNFI) is a leading distributor of natural, organic and specialty foods in North America. Founded in 1976 and headquartered in Providence, Rhode Island, the company has grown through strategic acquisitions and organic expansion to become one of the largest food distributors serving retail, foodservice and e-commerce customers.
UNFI's core business centers on the procurement, warehousing and distribution of a broad portfolio of products, including fresh produce, groceries, frozen foods, dairy, bakery items, beverages, supplements and household essentials.
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