Smederevac
When United Natural Foods (NYSE:UNFI) posted its second quarter results in September, I believed that the latest serious disappointment raised concerns even more. These concerns remain relevant as United Natural Foods has seen a soft start to 2024, yet some anecdotal positive trends are showing up. While the situation remains too dicey for me to have conviction, I am gradually seeing positive trends emerge here.
A Growth Story Gone Rogue
In the 2010s, United Natural Foods was a real darling among investors, with the natural food distributor on many occasions announcing bolt-on acquisitions, which combined with solid organic growth send shares to a high around the $80 mark in 2018.
This peak coincided with a business posting sales around $10 billion at the time, although that the distribution of healthier and organic foods is a slim margin business after all, with EBITDA margins posted at 3% and change. The investment thesis changed overnight as the company acquired SuperValu in a $3 billion deal, with the supermarket chain & distributor, adding over $15 billion in sales and $400 million in EBITDA.
The idea was to create a pro forma business with $25 billion in sales, $700 million in EBITDA, and a $900 million EBITDA number post synergies, as realization of synergies and growth was desperately needed with net debt reported at $3.3 billion. Nonetheless, pro forma earnings of $4 per share looked compelling, but far from riskless.
The deal did not work out in its entirety, or better said entirely not, as shares fell to the single digits pre-pandemic with investors believing that the company was on the brink of financial hardship, as the pandemic provided a lifeline, sending shares back up to $50 per share in 2021.
This was backed up by the results, with 2021 revenues (for the year ending in July of that year) coming in at $27.0 billion, and EBITDA reported at $770 million. Revenues improved to $28.9 billion in 2022, as EBITDA improved to $829 million, for earnings close to $5 per share.
The company originally guided for further improvements in 2023 with sales seen up to $30 billion, and EBITDA set to improve to $865 million, as net debt of $2.1 billion worked down to a 2.6 times leverage ratio.
A Big Shortfall
With food inflation pressure cooling during 2023, it was this trend which hurt margins in a big way. The company cut the EBITDA guidance to $750 million following the release of the first quarter results. The company cut the EBITDA guidance further to $630 million following the release of the third quarter results, as the business took another hit in the fourth quarter.
Late in September, shares fell to the $13 mark as the business posted a mere 2% increase in fourth quarter sales to $7.4 billion, with EBITDA being more than cut in half to $93 million, as the company posted an adjusted loss of $0.25 per share.
For the year the company posted a 23% decline in EBITDA to $640 million and reported adjusted earnings of $2.23 per share, cut more than in half from the original outlook, but the issue is that current earnings trended at much lower levels.
The problem was with the 2024 guidance, with sales seen up in a modest fashion to $30.9-$31.5 billion, yet the issue is that adjusted EBITDA is seen at just $450-$550 million, which would work down to a bottom line performance seen anywhere between an adjusted loss of $0.38 per share and profits of $0.88 per share.
The lack of profitability and increasing leverage ratios to 4 times is very discomforting, as some 5 years post the SuperValu deal, it is this transaction which is still haunting United Natural Foods here. Given all this, I understood why investors were very cautious, as I had zero interest in trying to become the hero, with much more work to be done.
Trading Stagnant – Underlying Trends Show Up
Since September, shares of United Natural Foods have largely traded in a relatively tight $14-$16 range. On the corporate front, it has been relatively quiet, with first quarter fiscal 2024 results being released early in December.
The company posted a 0.3% increase in first quarter sales to $7.6 billion, but the composition was poor, with minimal growth being the result of price hikes, supplemented by volume declines, both of which have not been quantified. Management did comment that inflation came down to 3% in the first quarter on the conference call.
The company posted a GAAP operating loss of $16 million, but this comes after a combined $23 million restructuring charge and loss on asset sales. Adjusted EBITDA imploded to $117 million. This was bad enough as it is, with leverage reported at 4.2 times EBITDA, based on trailing EBITDA of $550 million and a $2.3 billion net debt load. Of course, EBITDA trends at a lower pace here.
Following the softer quarter, the company reiterated the full year guidance. This was comforting as United Natural Foods’ executives, in the form of its CEO and CFO, actually bought some shares over the fall. These are positives trends, combined with new directors being nominated on the board, and activist investors getting involved as well.
Another piece of good news is that interest rates have moved lower in a convincing manner in the fourth quarter of the year, yet all these developments failed to lift off the shares in recent months.
With 59 million shares still trading at just $15, a near $900 million equity valuation is still minimal in relations to a near $2.3 billion net debt load here. While not reflected yet in the share price, it really seems that some kind of stability might be on the arrival here, seen in smaller positive signs, but investors in the company have been burned and disappointed before.
Given all this, I am still not yet willing to have conviction on the company and its shares here, although I grow a more constructive stance here.
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