UNFI moves forward with Fuel the Future strategic plan

United Natural Foods Inc.
New CEO sees opportunities to better serve customers through partnerships with suppliers, new strategy; expects FY 2022 to be stronger than FY2021.

United Natural Foods Inc.'s new CEO, J. Alexander “Sandy” Douglas, introduced himself to investors and analysts during Tuesday's earnings call.

Douglas joined the company on August 9, replacing Steve Spinner, who announced his retirement in September 2020. Most recently, Douglas was CEO of Staples; he previously was an executive with The Coca-Cola Company for 30 years.

Sandy Douglas, UNFI CEO, effective August 9, 2021"Let me begin by saying how happy I am to join UNFI and how excited I am to be back in the food business. Over my career, I’ve had the opportunity to meet and work with many of our customers, and I look forward to renewing and carrying forward those relationships," Douglas said. "I also look forward to meeting customers that I’ve not met and learning how UNFI can help make all of them even more successful.

"My early take is that there are significant opportunities to improve the way we serve existing and new customers. And the opportunity to partner with suppliers to bring customers the highest quality, differentiated products and services that they want and need."

New growth strategy prompts internal adjustments

Douglas joins UNFI as the national food distributor begins to implement a new growth strategy, Fuel the Future, which Spinner announced at Investor Day on June 24.

"I’m learning from the senior team about the details of the strategic plan, and I have to tell you, I like what I’m seeing," Douglas said. "The plan is customer focused and growth oriented with an estimated $140 billion addressable opportunity that we’ve talked about with existing and also potential new customers."

UNFI President Christopher Testa explained that the company will focus on increasing sales of its own brands—Woodstock, Tumaro's and Field Day—its professional services and its fresh foods.

"Starting with our own brands business, our three-pronged strategy for growth is built around increasing penetration with our existing customers, bringing own brands to new customers and channels that presently don’t carry them and introducing innovative items that meet the evolving needs of today’s consumers," Testa said. The company introduced about 100 new branded items in FY21 and plans to add 150 more in FY22, he said. Many of those products are plant-based or feature functional ingredients.

"This combination of larger customer base and relevant new product offerings is expected to be part of our growth in fiscal 2022," Testa said.

UNFI acquired a professional services business—credit-card processing, coupon handling, processing paychecks and more—when it purchased conventional-foods distributor Supervalu Inc. in 2018.

Since then, UNFI has expanded its service offerings, adding 17 in the past year. The services business grew 12% during FY21, and the company expects double-digit growth in FY22, as well, Testa said.

"Two noteworthy services coming this year include an advanced retail pricing platform that will allow customers to manage gross margins across the entire store in more sophisticated ways than were previously available from any wholesaler, and an offering that tracks scan data against product code dates and provide the store real-time information on unsold products that may be going past their code dates and allows them to better manage inventory and reduce shrink," he explained.

UNFI also has been working to improve its sales of fresh products, with investments in personnel, infrastructure and technology to support future growth. The company expects to increase produce sales at a rate several hundred basis points higher than the overall company's growth, Testa said. It also is employing produce specialists at many of its facilities.

"Deeper relationships with growers are expected to improve our supply consistency, take days out of the supply chain and ultimately improve product quality across the network and help drive sales," Testa said.

Perhaps most importantly in this time of tight supply lines, UNFI is adjusting wages at distribution centers and focusing on recruiting, hiring and training new associates so the company is ready for the holiday season and future growth, he said.

Nevertheless, UNFI's suppliers still have problems fulfilling orders.

"Suppliers face many of the same challenges we see in our network and the retailer community is growing fatigued with the limited assortments and increasing out of stocks across several key categories. These supply challenges caused our inbound supplier service levels to begin to deteriorate in the fourth quarter," Testa said. "To offset these challenges, we continue to proactively meet with our vendor partners to get our deserved share of supply in getting front of the upcoming holiday demand, so we can provide the best possible experience for our customers."

Fiscal year 2021 ends on a high note

UNFI finished FY21 with higher net sales and net income compared with a year earlier, the company reported with these additional highlights:

  •  Net sales of $27.0 billion, an increase of 1.5%.
  •  Net income of $149 million.
  •  Adjusted EBITDA of $746 million, an increase of 10.8%.
  •  Earnings per diluted share (EPS) of $2.48.
  •  Adjusted EPS of $3.88, an increase of 42.6%.
  •  Net debt reduction of $317 million.
  •  Net debt to adjusted EBITDA leverage ratio decreased to 3.1x.

For the fourth quarter, which ended July 31, net sales and net income were lower than in Q4 of FY20. Of course, the COVID-19 pandemic hit the U.S. just before UNFI's Q4 began, so more people were shopping for more food because they had to cook at home as restaurants were closed.

The company highlighted these results from the fourth quarter:

  •  Net sales of $6.7 billion, a decrease of 0.5% (+7.5% on a two-year stack basis).
  •  Net income of $43 million, a decrease of 18.9%.
  •  Adjusted EBITDA of $201 million, an increase of 1.5%.
  •  EPS of $0.69, a decrease of 22.5%.
  •  Adjusted EPS of $1.18, an increase of 11.3%.

Chief Financial Officer John Howard provided additional financial news during the conference call:

  • UNFI finished the year with net debt of $2.49 billion and total liquidity of $1.3 billion.
  • The company reduced debt $317 million from the end of FY20; debt reduction since 2018 is nearly $1 billion.
  • The company's leverage is 3.1x, down from 3.9x at the end of FY20; that includes $80 million toward building the new Allentown, Pennsylvania, distribution center and making other investments to support growth, automation and maintenance of physical assets, and more.

During the fourth quarter, UNFI ended its participation in three multi-employer pension plans that covered certain Cub employees. UNFI has replaced these defined-benefit plans with defined-contribution plans.

"Across our multi-employer pension plans, we will continue to look for opportunities to maintain benefits for our associates, while also reducing risk around future retirement benefit obligations. We may have another transaction before the end of the calendar year," Howard said.

For FY22, the company expects net sales to fall between $27.8 billion and $28.3 billion, a 4% increase at the midpoint. Adjusted EBITDA is expected to range from $760 million to $790 million, also a 4% increase at the midpoint. Adjusted earnings per share is predicted to be $3.90 to $4.20, again, a 4% increase at the midpoint.

UNFI also expects to reduce debt by $100 million to $250 million in FY22, Howard said.

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