• Revenue: Second quarter sales grew nearly 5% to $8.2 billion.
• Natural Products Sales: Increased by over 8% compared to last year's second quarter.
• Conventional Products Sales: Up just over 2% due to new business wins and customers.
• Retail Sales: Down about 3% primarily due to five store closures over the past 12 months.
• Same-Store Sales: Down about 40 basis points, a sequential improvement of about 100 basis points compared to Q1.
• Gross Margin: Consolidated gross margin rate, excluding LIFO, declined 20 basis points to 13.2% of net sales.
• Adjusted EBITDA: Grew over 13% to $145 million, with an adjusted EBITDA margin rate of nearly 1.8%.
• Adjusted EPS: $0.22 compared to $0.07 in last year's second quarter.
• Free Cash Flow: $193 million in the quarter, an improvement of approximately $77 million from last year.
• Net Leverage: Reduced to 3.7 times, the lowest level since fiscal 2023.
• Full Year Net Sales Guidance: Updated to a range of $31.3 billion to $31.7 billion.
• Full Year Adjusted EBITDA Guidance: Raised to a range of $550 million to $580 million.
• Full Year Free Cash Flow Guidance: Expected to be at least $150 million.

• Warning! GuruFocus has detected 4 Warning Signs with UNFI.

Release Date: March 11, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• United Natural Foods Inc (NYSE:UNFI) reported a strong quarter with sales growth of nearly 5% to $8.2 billion, led by an 8% increase in their Natural Products business.
• The company achieved an EBITDA growth of over 13% and significant improvement in year-over-year free cash flow.
• UNFI has successfully implemented Lean Daily Management in nine distribution centers, resulting in improved efficiency and reduced shrink to the second lowest level in the past 10 quarters.
• The company raised its full-year outlook for all financial metrics except capital spending, reflecting confidence in its multiyear strategy.
• UNFI's strategic realignment into two product-centered divisions is expected to offer more tailored solutions to customers and suppliers, enhancing their competitive edge.

Negative Points

• Total sales in UNFI's Retail business were down about 3% compared to last year, primarily due to five store closures over the past 12 months.
• The company's consolidated gross margin rate declined by 20 basis points compared to the prior year period, driven by a lower wholesale margin rate and a mix shift towards wholesale.
• UNFI's conventional products business saw a modest growth of just over 2%, indicating slower growth compared to the Natural Products segment.
• The company anticipates a sequential deceleration in sales growth from 4.6% in the first half of fiscal 2025 to around 3% in the second half of the year.
• UNFI is still in the process of optimizing its distribution network, with ongoing efforts to sell closed distribution centers and consolidate operations, which may pose operational challenges.

Q & A Highlights

Q: Can you explain the functional changes in the wholesale realignment and the biggest benefits you see? Also, does the new sales breakdown refer to natural products sold to any customer or all products sold to largely natural customers? A: The realignment focuses on product expertise, dividing the wholesale business into two product-centered divisions: one for conventional grocery products and another for natural, organic, specialty, and fresh products. This approach allows for specialized sales, procurement, and merchandising while maintaining enterprise-level capabilities in supply chain and IT. The sales breakdown applies to all customers, with natural products represented by experts in that category, regardless of the customer's primary focus. Sandy Douglas, CEO

Q: Regarding the closure of the Fort Wayne distribution center, were there duplicate costs that are now gone, and is there a step down in depreciation expense? What did you learn from this process? A: There were some duplicative costs in Q2, but operations have been transferred to other DCs, reducing OpEx and fixed costs at Fort Wayne. This contributes to our confidence in increasing EBITDA. We expect some step down in depreciation. The closure prioritized customer experience, ensuring smooth transitions while optimizing operations. These learnings will inform future facility closures and optimizations. Giorgio Matteo, CFO

Q: Are you seeing any changes in end customer behavior in the early weeks of Q3, given shifts in consumer sentiment? A: We haven't observed significant changes in consumer behavior recently. Our customer base continues to perform well, driven by strong strategies and differentiation. While there might have been some up-stocking in certain categories, no major trends have emerged. Sandy Douglas, CEO

Q: How are lean principles being implemented in the new DCs, and what are the expectations for productivity gains? A: Lean Daily Management has been rolled out to nine DCs, with expectations of mid-single-digit productivity gains. Initial implementations have shown improvements in safety, delivery quality, and productivity. We anticipate similar results as newer DCs adopt these practices. Giorgio Matteo, CFO

Q: What is the demand for natural and organic products from conventional retailers, and how does the realignment affect cross-selling efforts? A: The demand for natural and organic products remains strong across all channels, including conventional retailers. Our Wild Harvest brand is performing well, reflecting a broad consumer trend towards better-for-you products. The realignment enhances our ability to serve this demand by focusing on product expertise and innovation. Sandy Douglas, CEO

For the complete transcript of the earnings call, please refer to the full earnings call transcript.