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Food distributor United Natural Foods (UNFI) has struggled through a couple of tough years, as reflected by the stock's 56% plunge since the beginning of 2023, but the company's turnaround efforts are beginning to bear fruit. Bolstered by the benefits of its efficiency initiatives, significantly reduced shrink, and improving volume trends, UNFI comfortably surpassed top and bottom-line estimates for Q4, while achieving its strongest revenue growth since 2Q21 at +10.0%.

• A potent headwind facing UNFI is the consumer trend towards bargain and value shopping, including purchasing food items in bulk, which has greatly benefited Costco (COST) and Walmart's (WMT) Sam's Club. UNFI's largest customer, Amazon's (AMZN) Whole Foods Market, operates on the other end of the spectrum, offering premium and organic products at higher price points.
• In each of the past three quarters, UNFI's revenue growth has hovered around the flat mark, so it was encouraging to see the sharp acceleration in growth this quarter, which the company attributes to new business increases within its existing customer base.
• Thanks to the company's cost saving initiatives, particularly through G&A expense rationalization, operating expenses as a percentage of sales dipped by 30 bps yr/yr to 13.2%. Along with the 10% increase in net sales, UNFI's solid cost containment efforts enabled EPS to improve to $0.01 compared to $(0.25) in the year earlier period, and adjusted EBITDA to increase by 54% yr/yr to $143 mln.
• Perhaps more so than the actual Q4 results, the stock's strength today is tied to the rising optimism surrounding UNFI's three-year business plan that's designed to expand margins and free cash flow. A key component of that plan revolves around optimizing and consolidating its distribution centers. On that note, UNFI consolidated its Billings and Bismark distribution centers into other facilities this quarter.
• Relatedly, the company is focusing on reducing the capital intensity of its business through its network optimization strategy. Last quarter, UNFI cut its FY25 capex guidance to approximately $300 mln from its prior forecast of $370 mln -- a target that it reiterated in this morning's Q4 earnings report. This decrease in capex spending will allow UNFI to pay down debt and invest in higher-margin parts of the business, such as services.
• Over the next few years, the company also believes it has the opportunity to further improve its cost structure by implementing supply chain efficiencies and reducing transportation costs and shrink. In FY24, UNFI removed over $150 mln in costs and it anticipates a similar level of cost reductions as it implements its three-year plan.

The main takeaway is that while UNFI is still contending with a difficult business climate as traditional grocers cede market share to retailers like COST or WMT, the company is executing at a much higher level now as it moves ahead with its three-year plan.