United Natural Foods, Inc. Q3 FY2026 earnings call

Strategic Focus & Market Position

• UNFI's value creation strategy is focused on serving differentiated growing grocery retail segments: regional independent grocers, natural/organic retailers, and multicultural/neighborhood grocers, which make up the company's $90 billion target addressable market.
• These differentiated segments have outperformed the broader U.S. grocery market over the long term: regional independents have roughly doubled market share over 20 years, while natural/organic retailers have tripled share, and continued low single-digit aggregate growth for the segment in Q3 FY2026.

Capability & Product Innovation

• Expanded leadership with a new head of digital services, and launched a new digital marketplace called Endless Isle, which gives retailers easier access to emerging innovative brands and helps suppliers expand reach with lower friction; early feedback from partners has been positive.
• Added more than 30 new SKUs to the private brand portfolio, focused on helping retailers differentiate assortments and meet growing consumer demand for nutritious food options.

Supply Chain & Technology Improvements

• Rolled out the AI-powered supply chain and procurement planning platform to all distribution centers (DCs), with supplier-facing deployment ongoing; the platform is already improving fill rates, inventory management, and free cash flow conversion.
• Expanded use of the AI-powered Samsara fleet management platform, adding driver coaching to improve safety, optimize routes, and boost delivery execution. Year-to-date, on-time deliveries have increased over 4% and average miles per delivery have declined nearly 5% compared to the prior year.
• Rolled out the cloud-based warehouse management system to 5 additional DCs, improving network reliability and consistency.
• Implemented lean daily management in 40 DCs as of Q3 end, an increase of 4 facilities from the prior quarter. DC productivity increased over 7% year-over-year.

Financial Performance

• Gross margin rate increased 20 basis points year-over-year to 13.6%, benefiting from network optimization.
• Operating expenses fell nearly 7% year-over-year, with the operating expense rate dropping 40 basis points to 12.4% of net sales.
• Adjusted EBITDA grew nearly 17% to $183 million, with adjusted EBITDA margin expanding 40 basis points to 2.4% of net sales.
• Adjusted EPS increased to $0.77 from $0.44 in the prior year quarter.
• Generated $54 million in free cash flow for the quarter, bringing year-to-date free cash flow to $243 million, a $90 million increase year-over-year.
• Lowered net leverage to 2.5x, a 0.8x improvement year-over-year, with net debt of $1.63 billion, the lowest level since FY2018. Repurchased nearly 1 million shares for $38 million year-to-date, and completed a $150 million voluntary prepayment of 2028 senior notes, and refinanced the $2.53 billion asset-based lending facility, extending maturity to 2031 and cutting annual borrowing costs by $2 million.

Total company net sales for Q3 FY2026 were $7.7 billion, a 4.2% year-over-year decline, including a 450 basis point drag from strategic accretive optimization actions and a headwind from the unwind of short-term project work for a single customer. Excluding these impacts, underlying net sales grew in line with the low single-digit growth of UNFI's $90 billion target addressable market.

1. Natural Products Segment: Reported sales growth of over 4% year-over-year; after adjusting for the 200 basis point headwind from the project work unwind, underlying organic growth is in the mid-single-digit range, outperforming the broader grocery market. Two-year stacked growth has remained consistently strong over the past five quarters, driven by ongoing consumer demand for natural, organic, fresh, and specialty products.

2. Conventional Products Segment: Sales declined nearly 14% year-over-year, almost entirely driven by deliberate strategic network and customer portfolio optimization actions. Approximately 90% of UNFI customers purchase both conventional and natural products to support their differentiated retail strategies.

3. Retail Segment: Total retail sales declined around 10% year-over-year, primarily due to planned top-line impacts from strategic store closures as part of footprint optimization. Same-store sales declined 4%, driven by a challenging operating environment and shifts in the pharmacy backdrop, though food-driven same-store sales saw sequential improvement in the company's Minnesota market operations.

• Management reiterated the midpoints of all FY2026 full-year guidance metrics, and narrowed the expected ranges for net sales, net income, EPS, adjusted EBITDA, and adjusted EPS, reflecting disciplined execution, accelerated profitability benefits realized in Q3, and high confidence forecasting methodology.
• Investment spending is expected to ramp in the final quarter of FY2026 to support ongoing supply chain, technology, and commercial capability enhancements.
• The unwind of the short-term single-customer project work will be fully completed by Q3 FY2027.
• After finishing the cycle of large optimization actions in Q1 FY2027, UNFI expects its broader wholesale business to return to low single-digit sales growth in FY2027.
• Food inflation is expected to remain in the low single-digit range through the end of FY2026. Formal FY2027 guidance will be shared in September 2026, but management expects the core framework of return to sales growth, ongoing capability expansion, and continued productivity gains to hold.

• Consumer demand faces incremental macro pressures, particularly for lower socioeconomic consumers, driven by higher energy costs and reduced SNAP funding, leading to increased consumer focus on value.
• Fuel and transportation costs are rising, creating margin pressure in the final quarter of FY2026.
• Inflation could accelerate above current low single-digit expectations in FY2027, creating uncertainty for input pricing and margins.
• Forward-looking performance projections involve inherent risks and uncertainties that could cause actual results to differ materially from expectations, as detailed in the company's SEC filings.

Q: What is the current performance of the underlying natural/organic segment, and what trends are you seeing from conventional customers adding more natural/organic and private label products? / A: Excluding 450 basis points of planned portfolio optimization and 200 basis points of project work unwind headwind, underlying natural segment growth is mid-single-digit, with consistent strong two-year stacked growth across the last five quarters. The company's sales pipeline remains very strong, supporting the expectation of returning to growth in FY2027. A core industry trend is retailers using natural/organic assortment as a key differentiation strategy, and UNFI is supporting this growing demand with its extensive natural/organic product portfolio.

Q: How does UNFI assess growth opportunities between the larger differentiated regional grocer segment and the smaller pure-play natural/organic segment, and can UNFI grow faster than its target addressable market? / A: Both segments are durable, growing at or above overall grocery industry growth rates, consistent with 20 years of historical performance. UNFI's $90 billion target addressable market includes both pure-play natural retailers, growing differentiated regionals, and conventional retailers pursuing differentiation strategies, so the company participates across all growing cohorts. Management expects net-net performance to be in line with target addressable market growth, with potential small offsetting factors that could push growth slightly above or below that benchmark.

Q: What impact have rising diesel prices had on margins, do you pass these costs through to customers, and would adjusted EBITDA have been at the high end of guidance without fuel costs? / A: UNFI manages fuel costs through three core tools: partial hedging, contractual fuel surcharge protections that share pressure with customers, and route optimization to reduce total mileage. Management modeled incremental fuel costs in Q4 FY2026 guidance, and chose to balance year-to-date upside by accelerating planned investments rather than raising the guidance midpoint, so guidance already accounts for current fuel dynamics.

Q: What is the outlook for capital expenditures moving forward? / A: Over the last four years including FY2026 guidance, cumulative capex has been roughly $1.25 billion, equal to approximately 1% of annual sales, varying slightly based on the timing of automation investments. The company shifted to usage-based maintenance rather than calendar-based maintenance, which smooths spending over time. Management will continue to prioritize investments in safety, maintenance, technology, supply chain modernization, and growth, staying around the 1% of sales long-term average, with spending shifting between automation, technology, and modernization quarter to quarter.

Q: How should we think about working capital dynamics going forward after large positive contributions in recent years? / A: Working capital has remained a positive source of free cash flow year-to-date in FY2026, driven by ongoing initiatives including AI-powered inventory planning that reduced inventory days on hand, optimized payment terms with suppliers, and improved collections processes to reduce days sales outstanding. While the magnitude of annual working capital improvements is expected to decrease as the company has already captured large gains in FY2025 and FY2026, management will continue to focus on disciplined working capital optimization to support free cash flow. No out-of-pattern receivable risk has been observed despite current economic conditions.