Release Date: December 10, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- United Natural Foods Inc (UNFI, Financial) reported a revenue growth of over 4% in the first quarter of fiscal 2025, driven by positive volume growth in its wholesale business.
- The company achieved a nearly 15% increase in adjusted EBITDA compared to the prior year, marking the fifth consecutive quarter of sequentially improving adjusted EBITDA.
- UNFI has successfully implemented Lean management principles, resulting in a 5% improvement in cases per hour and an 11% improvement in fulfillment quality at pilot distribution centers.
- The company has raised its full-year outlook for all financial metrics except capital spending, reflecting confidence in its multiyear strategy and financial objectives.
- UNFI's focus on efficiency and service levels has led to a 6% increase in net sales per employee, contributing to improved profitability and free cash flow generation.
Negative Points
- Retail sales fell 3% year over year, with same-store sales down 1.4%, partly due to targeted promotional investments.
- The gross margin rate declined by about 40 basis points compared to the previous year, affected by changes in business mix and lower procurement gains.
- UNFI's net debt levels increased sequentially to $2.2 billion, contributing to a net leverage increase to 4.2 times.
- The company is facing challenges in its conventional segment, with modest volume declines and ongoing dynamics with distribution center optimization.
- UNFI's retail business, particularly in the Twin Cities, has been soft, requiring strategic investments in price competitiveness to drive a turnaround.
Q & A Highlights
Q: Sandy, can you discuss the balance between managing inventory locally and buying with the benefit of scale, and how you plan to strengthen accountability through compensation changes?
A: J. Alexander Douglas, CEO: Our strategy focuses on adding value to customers and suppliers by ensuring timely delivery of products. We're aiming to reduce inventories to pre-COVID levels, similar to our shrink reduction goals. Decentralizing decision-making closer to stores helps improve working capital efficiency and service. We're also aligning compensation with business outcomes, though it's early days in refining this model.
Q: Your updated sales guidance suggests a deceleration for the rest of the year. Can you explain the drivers behind this, particularly regarding inflation and volume?
A: Giorgio Tarditi, CFO: We saw 2% volume growth in wholesale in Q1, with total growth of 4.2%. For the rest of the year, we're expecting about 1% growth, balancing strong natural customer performance, modest declines in conventional, and DC optimization dynamics. We're retaining most customers from closed DCs and expect similar outcomes with Fort Wayne.
Q: Can you elaborate on the gross margin rate contraction in the quarter and the outlook for it?
A: Giorgio Tarditi, CFO: The gross margin rate was 13.3% in Q1, down from 13.7% last year, mainly due to planned customer and product mix changes. We're focused on improving margins through shrink reduction, growing professional and digital services, and enhancing private brands. Despite margin pressure, we achieved operating leverage with a 15% EBITDA growth.
Q: How is demand for your services tracking, and where do you see services growing in the long term?
A: J. Alexander Douglas, CEO: Services and brands have been outgrowing the company, contributing significantly to profitability. We focus on professional services, digital stores, and Brands Plus strategy. These areas are crucial for growth, though we don't disclose specific segment details.
Q: Regarding the supplier go-to-market programs, how successful have they been, and how do they impact your business?
A: J. Alexander Douglas, CEO: We've seen compelling results, such as a large supplier regaining 35,000 SKU opportunities lost during COVID. Smaller suppliers benefit from sales visibility through our system. The program allows for better planning and execution, with a focus on improving the supplier experience.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
