UNFI: Grocery Distributor Coming Off Historically Low Margins

Steven Gorelik of Firebird Management presented his in-depth investment thesis on United Natural Foods Inc (US: UNFI) at Best Ideas 2025.

Thesis summary:

United Natural Foods Inc is an organic and conventional grocery distributor serving 30,000+ customers in the US. The company recently had an enterprise value of $3.8 billion, while reporting trailing sales of ~$31 billion and adjusted EBITDA of $535 million.

UNFI was founded in 1976 as a distributor of specialty and organic products. The company went public in 1997. UNFI grew sales and EBITDA at a low-teens CAGR from 1997 to 2018. The acquisition of Supervalu in 2018 more than doubled the company’s size but introduced significant leverage and complexity, as conventional and organic distribution businesses tend to be vastly different. Supervalu was a conventional distributor with retail operations. UNFI acquired Supervalu for $2.3 billion, and debt to EBITDA spiked to more than 10x following the acquisition.

From 2019 to 2021, combined company sales grew 21% while cash from operations grew by 3x. UNFI achieved almost $200 million in cost synergies related to the acquisition. The company reduced net working capital dramatically and benefited from product scarcity and high inflation. UNFI paid down debt by $1.3 billion during the COVID period thanks to strong cash flow.

Distributors benefit from inflation due to tight margins and a time lag between the purchase and sale of inventory. UNFI’s margins fell by 1% between 2022 and 2023 due to food inflation being below wage growth and due to a lack of supplier rebates. Meanwhile, the cost-of-living crisis shifts consumption away from UNFI’s customers to discounters and Walmart.

The rate of change in inflation is more important to UNFI’s business than absolute inflation levels. The company has extended its distribution agreement with Whole Foods through 2031, allowing
for debt refinancing. Supplier rebates have been coming back to pre-COVID levels. UNFI is also seeing early benefits from investments in automation and lean process implementation.

Steve cites a forecast of $100+ million in free cash flow in 2025, a 6% FCF yield based on UNFI’s recent market cap. FCF could exceed $300 million in 2027 due to the normalization of margins and benefits of automation. The recent market quotation of UNFI shares implies <5x EV/2027 EBITDA and a 20+% 2027 FCF yield. Steve expects the company to generate one-third of the recent market cap in free cash flow over the next three years.

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About the instructor:

In addition to being Head of Research at Firebird Management, Steve Gorelik is the Lead Fund Manager of Firebird U.S. Value Fund as well as portfolio manager of Firebird’s Eastern Europe and Russia Funds. He joined Firebird in 2005 from Columbia University Graduate School of Business while completing education from a highly selective Value Investing Program. Prior to business school, Steve was an operational strategy consultant at Deloitte working with companies in various industries including banking, healthcare, and retail. He holds a BS degree from Carnegie Mellon University as well as a CFA (chartered financial analyst) charter and a membership in Beta Gamma Sigma honor society. Steve serves on the number of supervisory boards of listed and private companies in the Baltics. He speaks Russian, English and his native Belarussian.