What happened
Shares of grocery and non-food distributor United Natural Foods (UNFI 3.05%) were down by 25% this week as of midday Thursday, in the wake of a highly disappointing fiscal fourth-quarter 2023 report and weak guidance for its fiscal 2024.
Its loss of $68 million for the quarter that ended July 29 was bad enough (it helped reduce the company's full-year net income to just $24 million), but management's guidance for a net loss in fiscal 2024 in the range of $36 million to $110 million was even worse.
It's not uncommon for food distributors to have wafer-thin margins, and United does. Because of that, relatively minor issues can dramatically impact its profit. Discussing the company's ongoing issues on the earnings call, CEO James Douglas cited the enduring impact on costs of taking longer than expected in "modernizing and unifying our technology and network platforms." Douglas noted that the pandemic lockdowns, supply chain issues, and, more recently, inflation had negatively impacted the company's efforts on this front.
Furthermore, as CFO John Howard noted: "The biggest driver for the decline in Q4 year-over-year profitability was lower levels of procurement gain opportunities resulting from decelerating inflation." In plain English, the company's opportunities to deliver outsize profits by purchasing produce and then selling it later for higher prices in an inflationary environment were being constrained because inflation was easing. In addition, United suffered elevated levels of shrinkage -- a problem it claims it is addressing.
So what
The disappointing results and guidance highlight the substantive work the company needs to do, not least in modernizing and automating its supply chain in the coming year. While its investment plans make sense, they don't come without execution risk, and investors will want to see signs of progress in the coming quarters.
Image source: Getty Images.
Now what
While the outlook for the company is challenging, management still expects to generate $450 million to $550 million in earnings before interest, taxation, depreciation, and amortization (EBITDA) in fiscal 2024. At the midpoint, that would put it on an enterprise-value-to-EBITDA multiple of 5.6. That would be a highly attractive multiple if its transformation plans start to work out and fiscal 2024 proves a trough year.
