Food distributor United Natural Foods (UNFI, Financial) has faced a tough couple of years, with its stock plunging 56% since the start of 2023. However, the company's turnaround efforts are beginning to yield results. Thanks to efficiency initiatives, reduced shrink, and improving volume trends, UNFI surpassed top and bottom-line estimates for Q4, achieving its strongest revenue growth since 2Q21 at +10.0%.
- UNFI faces a significant headwind due to the consumer trend towards bargain and value shopping, which benefits Costco (COST, Financial) and Walmart's (WMT, Financial) Sam's Club. UNFI's largest customer, Amazon's (AMZN, Financial) Whole Foods Market, offers premium and organic products at higher price points.
- UNFI's revenue growth had been flat in the past three quarters, making the sharp acceleration this quarter encouraging. The company attributes this growth to new business increases within its existing customer base.
- Cost-saving initiatives, especially through G&A expense rationalization, reduced operating expenses as a percentage of sales by 30 bps year-over-year to 13.2%. With a 10% increase in net sales, UNFI's cost containment efforts improved EPS to $0.01 from $(0.25) in the previous year, and adjusted EBITDA increased by 54% year-over-year to $143 million.
- The stock's strength today is tied to rising optimism around UNFI's three-year business plan aimed at expanding margins and free cash flow. A key part of this plan involves optimizing and consolidating distribution centers. This quarter, UNFI consolidated its Billings and Bismark distribution centers into other facilities.
- UNFI is also focusing on reducing the capital intensity of its business through network optimization. Last quarter, the company cut its FY25 capex guidance to approximately $300 million from $370 million, a target it reiterated in its Q4 earnings report. This reduction will allow UNFI to pay down debt and invest in higher-margin parts of the business, such as services.
- Over the next few years, UNFI aims to further improve its cost structure by implementing supply chain efficiencies and reducing transportation costs and shrink. In FY24, the company removed over $150 million in costs and anticipates similar cost reductions as it executes its three-year plan.
The main takeaway is that while UNFI is still navigating a challenging business environment, with traditional grocers losing market share to retailers like COST and WMT, the company is executing at a much higher level as it progresses with its three-year plan.
