UNFI's Q1 2026: Contradictions Emerge on Conventional Segment Performance, EBITDA Margins, and Growth Strategies

Date of Call: None provided

Financials Results

• Revenue: $7.8B, roughly flat to last year (Q1 net sales $7.8 billion, roughly flat YOY)
• EPS: $0.56 per share, compared to $0.16 in the prior year (adjusted EPS Q1 $0.56 vs $0.16 PY)
• Gross Margin: 13.4% (management said +20 bps vs prior year); another speaker cited 13.6% vs 13.3% (up ~30 bps) — temporary procurement gains also noted
• Operating Margin: Operating expense rate 12.7% of net sales, improved from 12.9% in the prior year (reflecting improved efficiency)

Guidance:

• Fiscal 2026 sales expected $31.6B to $32.0B (midpoint roughly flat YOY; ~3% headwind from Allentown transition)
• Adjusted EBITDA guidance $630M to $700M (~20% YOY increase; ~35 bps margin expansion at midpoint)
• Adjusted EPS expected $1.50 to $2.30 per share
• Capital expenditures ~$250M for the year
• Free cash flow expected approximately $300M
• Net leverage target: reduce to below 2.5x by fiscal year-end

Business Commentary:

• Sales and Segment Growth:
• UNFI's natural segment experienced 11% growth in Q1, while conventional sales declined by 12% due to the transition out of the Allentown Distribution Center.

• The natural growth was driven by sustained demand for natural and organic products, new business projects, and strong retail execution, while the conventional decline was due to network optimization efforts.

• Profitability and Cash Flow Improvements:

• Adjusted EBITDA increased by nearly 25% year-over-year, reaching $167 million, and adjusted EPS increased from $0.16 to $0.56.

• The improvement was primarily due to better execution, efficiency, and productivity gains, as well as higher gross margins supported by temporary procurement gains.

• Inventory and Fill Rate Optimization:

• The company improved customer fill rates, trending above fiscal 2024 and 2025 levels through the implementation of the Relex platform and lean daily management.

• These initiatives helped address demand fluctuations and enhance service levels, despite structural challenges like fill rate issues.

• Debt Reduction and Financial Health:

• UNFI reduced its net leverage ratio by approximately 1 turn compared to the prior year quarter, reaching 3.2x.
• This was achieved through improved free cash flow and effective working capital management, indicating a healthier financial position.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted adjusted EBITDA up nearly 25% YoY and adjusted EPS of $0.56 vs $0.16 PY, free cash flow improvement of ~$105M YoY, and net leverage down ~1 turn to 3.2x with a target below 2.5x — statements repeatedly noted they are "firmly on track" to deliver the full-year outlook.

Q&A:

• Question from John Heinbockel (Guggenheim): Can you talk to drop size/new account distribution versus existing growth in Natural (50/50 split?), how big is the fill-rate opportunity, and how much more profitable can Conventional get given the EBITDA margin improvement this quarter?
  Response: Drop sizes are improving driven by growth with larger customers; fill rates are improving sequentially due to Relex rollouts and Lean management; Conventional margin improvement is driven by network optimization and supplier programs, with further margin upside from ongoing Lean, shrink reduction and indirect-cost actions (some Q1 benefit was temporary procurement gains).

• Question from Ed Kelly (Wells Fargo): Given the gross margin strength in the quarter, how sustainable is it and how much did network optimization contribute in Q1?
  Response: The Q1 gross-margin improvement is largely sustainable from Natural growth, supplier funds and shrink improvements; some procurement gains were temporary and not modeled going forward, but $167M adjusted EBITDA is presented as a reasonable recurring run rate.

• Question from Mark Carden (UBS): Excluding the Allentown transition, how would Conventional sales have looked, what's the health of the consumer in Natural vs Conventional, and any incremental customer attrition post-cyberattack?
  Response: Most Conventional weakness stems from network optimization (Allentown exit); Conventional faces consumer-driven pressure (SNAP/timing and discount competition) while Natural remains resilient (mid-single-digit long-term growth); customer attrition post-cyber event has been minimal with limited churn.

• Question from Kelly Bania (BMO Capital Markets): Did procurement gains drive upside to your plan and are they modeled going forward; can you comment on Conventional core sales pressure and supplier promotional behavior; also how widespread is the Natural growth?
  Response: Procurement gains occurred in Q1 but are treated as temporary and not modeled in 2026/2027; core Conventional pressure mainly reflects optimization and consumer dynamics, with retailers responding via value and assortment strategies; Natural growth is retailer-by-retailer, supported by project work and secular mid-single-digit category growth.

• Question from Charles Cerankosky (Northcoast Research): What's realistically left in Shrink for margin improvement and where will it come from?
  Response: Shrink will continue to contribute but less as a large-dollar source going forward; most margin expansion (~35 bps in 2026, ~60 bps 2024–2027) is expected from productivity programs, network optimization, supplier programs and Lean daily management across DCs.

• Question from Leah Jordan (Goldman Sachs): Update on new business pipeline (projects vs expansions), competitiveness for winning new wholesale business across Conventional vs Natural, and private-label strategy/penetration?
  Response: Pipeline is strong in both Natural and Conventional but disciplined underwriting is applied to pursue profitable, sustainable deals; competition focuses on differentiated product/service offerings rather than price alone; private-label is a strategic growth opportunity across good/better/best tiers with new leadership and below-industry penetration today.

• Question from Scott Mushkin (R5 Capital): If industry growth in Natural accelerates again, can UNFI's sales accelerate similarly, and if Conventional continues to deteriorate, how would that affect the business?
  Response: UNFI expects to compete and perform strongly if Natural category growth accelerates (Q1 included project-driven contributions); for Conventional, UNFI is targeting the subset of retailers that differentiate (service/assortment/local) and believes it can help those customers win even in tough macro conditions.

• Question from Peter Saleh (BTIG): With leverage at 3.2x and target 2.5x, how should investors model capital allocation — continued de-leveraging vs capital returns once targets are met?
  Response: Priority remains on de-leveraging (2026 target <=2.5x, 2027 <=2.0x) with free cash flow applied to reduce debt; capital allocation will continue to prioritize debt reduction while executing the planned $250M CapEx program.

Contradiction Point 1

Conventional Sales and Market Pressure

It highlights inconsistencies in the company's narrative regarding the state of its Conventional business and the market conditions it faces, which are crucial for understanding UNFI's growth strategy and investor expectations.

How are conventional sales excluding the Allentown transition and consumer health in the natural segments performing? - Mark Carden(UBS Investment Bank)

20251202-2026 Q1: The weakness in Conventional is largely due to network optimization, with consumer pressure from SNAP delays. - James Alexander Douglas(CEO)

Are volumes expected to increase by 2% excluding the cyber incident? - Kelly Bania(BMO Capital Markets)

2025Q4: Conventional volumes were flat year-over-year as we expected. We continued to gain customer share in Conventional market, which was slightly up quarter-over-quarter. - Giorgio Tarditi(CFO)

Contradiction Point 2

Network Optimization and Conventional Segment Performance

It highlights differing perspectives on the impact of network optimization on the Conventional segment's performance, which could influence strategic planning and investment decisions.

Can you discuss Conventional sales excluding the Allentown transition and consumer health in Natural segments? - Mark Carden(UBS)

20251202-2026 Q1: The weakness in Conventional is largely due to network optimization, with consumer pressure from SNAP delays. - James Alexander Douglas(CEO)

How does the breach impact the rollout of Lean Six Sigma? - Ed Kelly(Wells Fargo)

2025Q3: We're really pleased with the performance of the new network in terms of inbound and outbound metrics, time to dock, number of docks per hour, the ability to have extended hours were all in line with expectations. - Giorgio Tarditi(CFO)

Contradiction Point 3

Conventional EBITDA Margin Improvement Opportunities

It involves differing expectations regarding the potential for margin improvement in the Conventional segment, which could impact investment decisions and financial forecasts.

Can you discuss the potential for the Conventional business's EBITDA margin? - John Heinbockel(Guggenheim)

20251202-2026 Q1: Conventional EBITDA benefits from network optimization and supplier programs. The focus is on creating capabilities to help customers compete, with ongoing improvements in efficiency and execution. - Giorgio Tarditi(CFO)

How do you plan to approach the conventional segment long-term after ending the Key Foods partnership? - Leah Jordan(Goldman Sachs Group)

2025Q3: We are executing against our plan. We are executing against our strategy. And we don't see the need to go back in a big way and try to redo that strategy. - Giorgio Tarditi(CFO)

Contradiction Point 4

Conventional Segment Performance and Strategy

It highlights differing perspectives on the performance and strategy for the conventional segment, which is crucial for understanding the company's competitive positioning and growth potential.

Can you discuss the competitive environment in retail, particularly for Conventional and Natural? - Ed Kelly (Wells Fargo)

20251202-2026 Q1: The weakness in Conventional is largely due to network optimization, with consumer pressure from SNAP delays. - James Alexander Douglas(CEO)

Can you discuss core sales growth for continuing customers in the conventional segment? - Scott Mushkin (R5 Capital)

2025Q2: Conventional was roughly flat in volume, slightly better than the US food indicator. We believe our volume changes have outpaced many conventional peers. We are pleased with the sequential progress. - Matteo Tarditi(CFO)

Contradiction Point 5

Customer Retention and Growth Strategy

It involves differing perspectives on customer retention and growth strategies, which are critical for understanding UNFI's competitive positioning and long-term growth prospects.

Can you discuss drop size in Natural Growth and the opportunity for improved fill rates? - John Heinbockel(Guggenheim Securities)

20251202-2026 Q1: Our strategic focus is really on supporting profitable growth across a mix of customers. - James Alexander Douglas(CEO)

What is driving the revised 3-year guidance, and are there changes in customer attrition or new account growth assumptions? - Mark Carden(UBS Investment Bank)

2025Q4: We are performing better than expected due to strong organic growth in Natural and retention of more existing customers. - James Alexander Douglas(CEO)