United Natural Foods, Inc. Q2 FY2026 earnings call

• Focused on value creation strategy with shared, profitable growth. - Expanding AI-powered supply chain planning platform RELX across network, with about a dozen distribution centers to go live next week and expected completion by fiscal year end. - Launched nearly 50 new private label SKUs, with early adoption encouraged. - Spring and summer selling shows in Long Beach and Orlando brought nearly 7,000 customers and suppliers together. - Continued to strengthen lean practices across the organization, with lean daily management implemented in 36 DCs, and lean team conducting 12 process improvement workshops. - Reduced shrink by over 11%, while throughput and on-time deliveries increased nearly 7% each. - Repurchased nearly 750,000 shares of stock and made a voluntary $115 million prepayment on senior notes.

In the second quarter of fiscal 2026, overall sales were nearly $8 billion, a decline of 2.6% from last year, including an impact of nearly 500 basis points from accretive optimization actions. Natural product sales grew 7%, outperforming the market. Conventional product sales declined 12%, primarily due to strategic network optimization. Retail total sales fell 8%, but same-store sales improved sequentially by 100 basis points. Gross margin rate was 13.2%, up 10 basis points year over year. Operating expenses improved, with a 40 basis point reduction in operating expense rate to 12.2% of net sales. Adjusted EBITDA grew over 23% to $179 million. Free cash flow increased by $50 million to $243 million, net debt was reduced to the lowest level since fiscal 2018, and net leverage ratio was 2.7 times.

• Lowered full-year sales outlook to a range of $31 billion to $31.4 billion, a 1.9% reduction at the midpoint. - Increased full-year adjusted EBITDA outlook to $680 million to $710 million, a $30 million increase at the midpoint. - Updated adjusted EPS outlook to $2.30 to $2.70 per share. - Maintained full-year capital spending outlook at $250 million. - Increased full-year free cash flow expectation to approximately $330 million. - Anticipate being around 2.3 turns at year-end for net leverage, well below previous year-end target of 2.5 turns. - Expect business to return to growth in fiscal 2027 with cycling of larger optimization actions in Q1 2027. - Remain confident in long-term expectation of low single-digit average sales growth from fiscal 2026 through fiscal 2028.

Q: On the conventional side, asked about the 500 basis points headwind from network optimization and underlying business improvement.

A: Explained that 500 basis points of optimization headwinds is on total natural plus conventional, majority of conventional decline driven by network optimization, and removing optimization impact, conventional decline was in low single digit.

Q: Dived into pipeline composition, conventional vs natural.

A: Majority of pipeline is incremental categories with existing customers, some brand new relationships.

Q: Talked about productivity, asked about drivers and if sustainable.

A: Pleased with margin improvement, EBITDA growth in first half, drivers include throughput through automation, OPEX controls, and productivity projects.

Q: Asked about natural growth, underlying growth and impact of project work.

A: Natural organic specialty products have enduring dynamic, project-based business in natural started ramping in second half of 2025 and expected to wind down in second half of 2026.

Q: Asked about headwinds from SNAP factored into lower guidance.

A: Monitoring SNAP, think impact is manageable and embedded in outlook.

Q: Asked about free cash flow journey, next biggest drivers.

A: Generated $190 million free cash flow in first six months, drivers include increased EBITDA, disciplined working capital management, and leverage reduction.

Q: Asked about vendor-funded promotions and inflation impact.

A: Vendor promotions selective, shifted toward peak holiday moments, inflation model low single digits for remainder of year.

Q: Asked about share repurchases, outlook and visibility.

A: Main priority debt reduction and deleveraging, used part of share buyback basket, maintain flexibility for faster deleverage, organic investments, or opportunistic share buybacks.

Q: Asked about EBITDA margins cap and conventional business volumes.

A: Lean methodology sees significant opportunities to improve metrics, no cap on ability to improve, not sure on conventional business volumes but focused on right products for customers.

Q: Asked about value-add services contribution to margin expansion.

A: Professional and digital services group grows faster than company, view as important part of offering, more profitable.

Q: Asked about diesel costs and private brand execution progress.

A: Assessed diesel costs manageable with tools like fuel hedges and contractual protection. Private brand portfolio expected to grow faster than total business, focusing on innovation for differentiation.