It was a mixed quarter for UNFI, with higher sales but a major earnings dip from last year.
United Natural Foods, Inc. (UNFI) wrapped up its third quarter of the fiscal 2023 year in a way that’s become disconcertedly familiar for many industry organizations facing the same general headwinds: higher net sales and lower profitability. While inflation and new business helped lift net sales 3.7% to $7.5 billion on a year-over-year (YoY) basis, gross profits dipped 1.2% to $1 billion and net income fell 89.6% to $7 million from the $67 million posted during the third quarter of 2022.
CEO Sandy Douglas cited the challenging operating environment for the slide in net income and profit, which was mirrored by an 18.9% YoY decrease in adjusted EBITDA. “Our third quarter results continue to demonstrate the strength of our customer value proposition as sales and product penetration increased despite significant industry headwinds. However, our profitability was impacted by a greater than expected decline in gross margins reflecting a challenging operating and macroeconomic backdrop, which contributed to lower inflationary benefits primarily related to reduced procurement gains, as well as higher shrink,” Douglas explained.
To Douglas’s point, the lower-than-anticipated profit performance is attributed in part to volatile conditions that inhibited more benefits from inflation and reduced procurement gains. Higher shrink was another factor, according to UNFI’s report.
As a result of the Q3 performance and a still-uncertain macroeconomic outlook, UNFI is lowering its outlook for rest of the fiscal year. The business maintains its sales projections, expected to fall between $30.1 billion and $30.5 billion, but has revised its net income prediction to land between $11 million and $41 million. That is in contrast to the March 8 estimate of $90 million to $142 million.
During the earnings call following the release of the latest financial results, UNFI shared some short-term actions that are being taken to shore up near-term profitability, as the company also pursues longer-term structural efforts to optimize growth and efficiency. Among other actions, UNFI plans to curb selling, general and administrative (SG&A) spending, make administrative structural efficiencies and optimize SKUs in a way that will also help improve operating expenses in its distribution centers.
As UNFI confronts market headwinds and makes short-term adjustments, the company reported some positive news during the third quarter as well. According to CFO John Howard, the new business pipeline remains strong and diversified across all channels. The company was also able to reduce its outstanding net debt by $46 million, to the lowest level since acquiring Supervalu in 2018. At the same time, UNFI started a climate action partnership to encourage suppliers to make credible climate commitments.
Providence, R.I.-based UNFI delivers a wide variety of products to customer locations throughout North America, including natural product superstores, independent retailers, conventional supermarket chains, e-commerce retailers and foodservice customers. The largest publicly traded grocery distributor in America, the company is No. 20 on The PG 100, Progressive Grocer’s 2023 list of the top food and consumables retailers in North America.