United Natural Foods, Inc. (NYSE:UNFI) Q2 2024 Earnings Call Transcript
United Natural Foods, Inc. (NYSE:UNFI) Q2 2024 Earnings Call Transcript March 6, 2024
United Natural Foods, Inc. beats earnings expectations. Reported EPS is $0.07, expectations were $0.01. United Natural Foods, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Jeannie and I will be your conference operator today. I would like to welcome you to the UNFI Fiscal 2024 Second Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. I will now like to turn the conference over to Steve Bloomquist. Steve Bloomquist, you may begin your conference.
Steve Bloomquist: Good morning, everyone. And thank you for joining us on UNFI's second quarter fiscal 2024 earnings conference call. By now you should have received a copy of the earnings release issued this morning. The press release and earnings presentation, which management will speak to, are available under the Investors section of the company's website at www.unfi.com. We've also included a supplemental disclosure file in Microsoft Excel with key financial information. Joining me for today's call are Sandy Douglas, our Chief Executive Officer; and John Howard, our Chief Financial Officer. Sandy and John will provide a business update, after which we'll take your questions. Before we begin, I'd like to remind everyone that comments made by management during today's call may contain forward-looking statements.
These forward-looking statements include plans, expectations, estimates and projections that might involve significant risks and uncertainties. These risks are discussed in the company's earnings release and SEC filings. Actual results may differ materially from the results discussed in these forward-looking statements. And lastly, I'd like to point out that during today's call, management will refer to certain non-GAAP financial measures. Definitions and reconciliations to the most comparable GAAP financial measures are included in our press release and the end of our earnings presentation. I'd ask you to turn to slide six of our presentation as I turn the call over to Sandy.
Sandy Douglas: Thanks Steve. We appreciate everyone joining us for our second quarter call. In my remarks this morning, I'll provide a brief review of our results, the operating environment, and the progress we're making resetting and restoring our profitability and driving sustainable value creation for our customers, suppliers and our shareholders. I'll also discuss this morning's other release, in which we announced that Matteo Tarditi will be joining UNFI later this spring as our new President and CFO. Our second quarter results again exceeded expectations and reflected a sequential improvement in adjusted EBITDA. This resulted from continued improvements in operational execution, progress on our near-term value creation initiatives, and some seasonality benefits.
We accomplished this despite an industry backdrop that continues to be challenging. Inflation rates continue to decline sequentially, with some category-specific deflation occurring. Despite this trend, overall unit volumes remain under pressure and increased competition in food retail persists. Following a prolonged period of high inflation, consumers are continuing to buy less and are shifting some purchases away from the traditional grocery channel. This has led to negative volumes across the retail food industry and share gains by mass merchandisers and discounters. Given these challenges, we are focused on strengthening and adding new capabilities in addition to driving increased efficiency across our business so that we can help our customers remain as competitive as possible.
Many of our customers are performing well, even in this environment, especially those with differentiated go-to-market propositions. Importantly, we see successful food retailers positioned across the value spectrum in both large and small markets and in natural and conventional channels. No matter how our customers are positioned, in their markets we are focused on supporting them and their unique strategies with improved efficiency, service levels, and market intelligence, as well as with the introduction of new products, well-executed promotions, merchandising expertise and professional services. Similar to how our customers are setting themselves apart and creating significant value for consumers and their communities, UNFI continues to differentiate itself through continuous improvement.
This includes refining operational execution, maintaining a broad, diversified assortment, providing value-added services that drive cost savings and help generate growth for retailers, and driving supply chain efficiencies that are optimized with industry scale. We're working to realize this potential by embedding a transformation mindset across our business focused on driving improved profitability, cost management, innovation, and service levels across the short and long term. Over the last several months, we've actioned approximately $150 million in cumulative annualized savings from the near-term efficiency initiatives, and we see opportunities to further refine and lower our cost structure. We've realized additional incremental SG&A efficiencies, which are expected to benefit future profitability, while also improving our service levels and making it easier to do business with UNFI by streamlining our business.
We're continuing to review our organizational composition, to ensure that we are structured in a way that allows us to be focused with the needed skill sets, technology and insights to best drive profitability and growth for UNFI customers and suppliers. We've also continued to embed improved supply chain processes and management disciplines to drive significant improvement. For example, we've achieved significant reduction in shrink. Net shrink as a percentage of sales declined both sequentially from the first quarter, as well as compared to the prior year period, with shrink reduction meaningfully surpassing our prior expectations in the quarter. Importantly, we believe there's still room for further improvement. In addition to these improvements aimed at delivering near-term profitability gains, we are working to improve our commercial go-to-market programs to better connect suppliers and enhance their ability to see, invest in and rapidly capture win-win merchandising opportunities with our shared customers.
These program improvements are expected to significantly reduce operational friction, and over time we believe it will help maximize supplier investment in our customers, which should enable them to accelerate their own profitable growth, while helping UNFI to simplify our business model, drive savings, and ultimately support sustainable, profitable growth. We've continued to progress on key transformation investments that are expected to structurally increase our efficiency and service levels. The automation project at our Centralia Distribution Center remains on track to go live later this fiscal year, as does the realignment and optimization of our Northeastern Distribution Network currently in progress. These projects are expected to drive operational savings, increase fulfillment accuracy, and create higher capacity in these geographies.
We're also continuing to evaluate paths to reduce the near-term and long-term capital intensity of our distribution centers and will continue to be focused on optimizing the free cash flow profile of our network. Additionally, we've also driven significant improvement to the online tools our customers’ use, which is creating a more seamless ordering experience. We remain focused on the path to driving compelling long-term value creation by transforming the efficiency, profitability, and service levels of our business. We plan to build on the progress we've made so far this year as we move into the second half of fiscal 2024. I remain confident in the opportunities that we've already begun to action to create enduring value for all our stakeholders, especially our shareholders.
Importantly, while the external environment remains challenging, it continues to gradually become less volatile, which provides us a clearer look at the long-term trajectory of our industry and our business, and this provides a productive backdrop for our management and board-led finance review that we announced on our fourth quarter call, which remains ongoing. The Group of Directors leading the review on behalf of the broader board includes our Chairman, the Chair of our Audit Committee, and the three newest members of our Board who joined last September. This group brings strong backgrounds and experience in finance, business transformation, and strategic planning, and are actively involved with our management team in assessing a broad range of potential opportunities for meaningful value creation.
We'll plan to provide timely updates as the process moves forward. Before I turn the call over to John, let me take a moment to thank him for his years of service and leadership. John helped UNFI navigate the challenges of a global pandemic, and I have appreciated his counsel and partnership during my time at the company. I know he will be a helpful partner to Matteo too, as he works to enable a quick and smooth transition during his on-boarding. As I've said several times in the past, our philosophy is to recruit talented leaders who can help us execute our strategy and move the business forward. Matteo is a proven and experienced finance executive who has served as CFO of several of the largest reportable segments at GE. He has extensive operating company experience and has consistently delivered results and proven to be adaptable to different businesses.
He has also previously executed several transformations. I believe this experience, combined with his strong background in process excellence, is an important complement to the existing efforts that we have put in place to reset and improve our profitability. It also positions him well to augment the momentum we are building in our customer and merchandising capabilities across our existing organization. John will remain with UNFI until the end of May to help onboard Matteo and ensure a smooth transition. With that, let me now turn the call over to John for his remarks. John?
John Howard: Thank you, Sandy, and good morning everyone. As Sandy just noted, today will mark my last earnings call as CFO of UNFI. I look forward to partnering with Matteo during the transition over the coming months. Our finance leadership team is awaiting Matteo's start date and we're already preparing for his on-boarding process and expect a quick and smooth handoff. As you also heard earlier from Sandy, our second quarter was ahead of our expectations, driven by solid and improving execution across the business. Our updated outlook reflects this performance, balanced against an environment that remains challenging with consumers seeking value as they manage household spending. This morning I will provide commentary on the second quarter results, our balance sheet and capital structure, and some considerations as we look to the balance of the year and our updated fiscal 2024 outlook.
With that, let's review our Q2 results. Turning to slide eight, net sales decreased 50 basis points from last year's second quarter to $7.8 billion, reflecting a continuing negative year-over-year trend in units sold that was partially offset by inflation, albeit at a decelerating rate, and new business. Inflation declined by about 800 basis points compared to last year's second quarter, and we are continuing to see category-specific deflation. As Sandy discussed in his remarks, the environment continues to be challenging for traditional grocery retailers. However, there is diverse performance across our customer base. We see this in our own results as well as with some channels continuing to grow while others face significant pressure in a highly competitive environment.
Sales in our retail business declined by approximately 4.4% as we continue to be impacted by a difficult macro and industry environment. This partially reflects a significant decline in government assistance. Flipping to slide nine, let's now look at our profitability drivers this quarter. Our gross profit rate, prior to the non-cash LIFO charge in both years, decreased by about 60 basis points, which was close to our expectations. As we've previously stated, the second quarter is when we've now cycled most of the elevated procurement gains that benefited last year's gross profit rate in quarters one and two. While there are still some procurement gains to be cycled in the second half, the level of gains in the prior year period is expected to decline sequentially from Q2 to Q3 and from Q3 to Q4.
As a reminder, the gains we experienced last year were driven by substantial supplier price increases that led to last year's Q2 inflation rate of about 10%, which is meaningfully higher than this quarter's rate of around 2%. The anticipated decrease in procurement gains was partially offset by continuing progress on reducing shrink, which was markedly lower than last year's second quarter. Our operating expenses, excluding business transformation costs as a percentage of sales were down sequentially compared to the first quarter and flat versus last year's second quarter. We again saw improving throughput in our DCs, which rose by nearly 12% compared to last year's second quarter, and a further decline in turnover rates. We've also seen steadily increasing outbound fill rates.
These improvements were offset by DC start-up and real estate related costs, which include about $5 million related to rent we began incurring part-way through the quarter for our new Manchester, Pennsylvania DC, expected to go live in fiscal 2025. This also includes continued investment and foundational initiatives designed to drive operating efficiencies and provide the highest possible service levels for our customers. Adjusted EBITDA totaled $128 million or 1.6% of sales, compared to $181 million or 2.3% of sales last year, with the difference being largely the decline in gross profit related to cycling last year's inflation-driven procurement gains. Within our retail segment, there was a $9 million sequential increase in adjusted EBITDA, primarily related to the holiday selling season.
Our GAAP loss was $0.25 per share, which included $0.32 in charges, primarily for business transformation costs and LIFO. Adjusting for these as well as several smaller items, our adjusted EPS totaled $0.07 compared to $0.78 per share last year, with the largest driver of the change being the lowered level of adjusted EBITDA. Moving to slide 10, we finished the quarter with total outstanding net debt of $2.16 billion, a $124 million decrease compared to the end of the first quarter. This reflects the cash inflows from the expected lower levels of investment and working capital, now that we're through the holiday selling season. We retained significant balance sheet flexibility with $1.4 billion of liquidity. We will continue to manage our debt structure consistent with optimizing our long-term credit profile and expect to maintain our base of pre-payable debt, including our term loan, to provide capital structure flexibility as our turnaround plan and long-term strategy are implemented.
Turning to slide 11, as outlined in our press release, we're updating our full-year outlook for fiscal 2024 to reflect our performance to-date and the operating environment that continues to be challenging. We've lowered the midpoint of our expectation for full-year net sales by about 1.4% to a new range of $30.5 billion to $31 billion. For adjusted EBITDA, we've narrowed the range to $475 million to $525 million, maintaining the midpoint of $500 million, and we've updated the corresponding range for adjusted EPS, which is now expected to be a loss of $0.56 to earnings of $0.06 per share. Our outlook for fiscal 2024 capital and cloud implementation expenditures remains at approximately $400 million, including investments in our transformation plan, with the largest component going towards network optimization and automation.
This also includes investments to continue to improve our technology infrastructure that we believe will drive higher efficiency. This outlook balances our year-to-date progress, resetting and improving profitability, and our new customer expectations with a macroeconomic and industry backdrop that remains challenging. We expect inflation to continue to decline, but believe the pace of the decline is likely to moderate. We also continue to anticipate a more prolonged recovery for volume, but remain cautiously optimistic that these volume trends will drive increases in the quantity and depth of supplier promotions, which benefits both our customers and UNFI. As for the balance of the year, the implied level of adjusted EBITDA for the second half of the year, at the midpoint of our outlook, is approximately $255 million, including about $9 million from the 53rd week in the fourth quarter.
This modest acceleration includes our expectations for the continued ramp-up of our cost-saving initiatives, further incremental improvements in shrink, and disciplined expense management, which will help enable investments in our new Manchester Distribution Center. We expect about $14 million of incremental rent and other expenses related to our Manchester, D.C. within our second half results. Importantly, the focus of these near-term investments is largely on increasing efficiency and profitability. In summary, as outlined on slide 12, our updated outlook for fiscal 2024 balances the challenging operating backdrop, our performance year-to-date, and a relentless focus on execution and cost management. We remain encouraged by our overall performance in the first half of our fiscal year and continue to be focused on driving profitability through efficiency and effectiveness in our supply chain and retail stores.
We remain confident in our business model and transformation agenda, as well as our management team and Board of Directors' ability to execute our strategy and deliver increased shareholder value. Before we open the call for questions, I would like to thank those of you that I've interacted with over the past five years for your support and feedback. I'm leaving UNFI as an eager shareholder with conviction that its future is bright and Matteo will be a strong leader to support the organization. Operator, please open the line for questions.
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