Kingdom Capital 的 David Bastian 谈 United Natural Foods $UNFI

You're about to listen to the yet another value podcast with your host me, Andrew Walker. Today's podcast is my friend David Bastian from Kingdom Capital comes back on the podcast. I thought it was his third or fourth time on the podcast. It might be his second time. We we talk pretty frequently. David is a super smart guy and we dive deep into Finchwit's probably favorite turnaround stock in the like value Finchwood community, United Foods, UNFI. Uh there's a disclaimer at the end of the podcast. You can listen to that, not investing advice, all that. But it's a really interesting podcast. We dive really deep into it. I think I mean David has done a thousand times more work than me, but both of us thought really deeply about this and have done a lot of work on this. So I think it's a really fascinating and interesting conversation about again a stock that's got kind of the finitaround community buzz. So we'll hop there in a second, but first a word from our sponsors. Today's episode is brought to you by FinTool. Finul is the AI junior analyst tailored specifically for individual investors. Everyone in finance is racing to figure out how AI can best be integrated into their investment process. And one of the biggest areas that is catching on with institutional investors is analyzing SEC filings and earnings call transcripts. FIN tool takes hours of combing through filings and control effing transcripts down to seconds. Whether it's comparing the current call with prior quarters, finding that sneaky change in the footnotes, or compiling the key facts into an easy to digest onepager, FinTool is saving you hours so that you can go deeper and search wider because your time is better spent turning over more rocks or researching the things that AI can't. Go to fintool.com to transform your research process. That's fintool.com. All right. Hello and welcome to yet another value podcast. I'm your host Andrew Walker.

With me today, I'm happy to have David on. Is this the third or fourth time? I'm not sure. You're approaching co-host territory, but David Bastian from Kingdom Capital. David, how's it going?

I'm doing pretty well, Andrew. Thanks for having me back.

Hey, thanks for coming on. I'm super excited to talk about the stock we're going to discuss today. Before we get there, a quick disclaimer: nothing on this podcast is investment advice. You can see a full disclaimer at the end of the podcast, but I'll just let you guys know: David and I hit a craps table together a couple of months ago, and after seeing the results from that craps table, I'm going to encourage everyone not to listen to anything the two of us have to say. Neither here nor there.

The company we're talking about today is United—I don't even know their name. I just call them UNFI. What's the full name? What's the official name?

United Natural Foods, Incorporated.

There you go. UNFI. I would call them Fintwit's favorite turnaround stock, but I don't want to spill the beans. I'll toss it over to you. What is UNFI, and why are they so interesting?

Sure. UNFI is a nationwide grocery distributor that also operates in Canada. They have about 50 distribution centers all over the US, service people in every state, and move groceries from suppliers to their distribution centers and then to grocery stores. They're not like Sysco or US Foods, which work a lot with restaurants. They are a grocery distributor and, soon to be, the only one trading in the public markets after SpartanNash finishes getting bought by C&S.

No, that's great. Great background, and there's a lot to talk about here. Again, this is Fintwit's favorite turnaround stock. But let's just start with the high-level market's competitive place. This is a billion-dollar company, and I think when most people think of Kingdom Capital, they think of small companies way off the radar. This is a billion-dollar company, with a $2.5 billion enterprise value, if I'm remembering correctly. I don't have my spreadsheet in front of me, but what about this company and the market's competitive place? This is big, so you can't just say, "Hey, no one's looking." This is big and well known, and it's one of the few food distributors out there. Why is this a risk-adjusted alpha opportunity in your mind?

Sure. The story has certainly changed a few times since I first became familiar with them. The first time I took a serious look at the company was back in 2019. They were about a year into digesting their merger with Supervalu. Most of the current problems with the company can be traced to that decision.

I was looking at it at the time. The merger had gone through when the stock was trading around $50 a share. I think it had been as high as $80 in the years around that time, and it was down to about $10 in 2019 when I started looking at it. It was one of those stories where they pitched the merger, took out a ton of debt to make it happen, and promised a lot of synergies and growth. Then things didn't go quite according to plan. All of a sudden, leverage ratios were blowing out, and late in 2019, the question became, "Are these guys going to be able to delever fast enough to make this work?"

Then came 2020. I was having a similar experience to many other people of watching the market slowly implode in February, and I had in the back of my mind that, as we were starting to go into shutdowns, UNFI was a grocery distributor. It was suddenly one of the only games in town. All the restaurants were closed; groceries were where it was at. That was when this became a big position for me the first time. I was buying a lot of it into the lockdowns, and it was one of those lucky, right-place, right-time ideas. I wasn't looking for grocery distributors, but I was looking at this company and thinking, "Wow, these guys seem like they're perfectly set up for the crazy environment we've just gotten into."

Then we had this COVID-fueled, year-and-a-half boom, where all of a sudden UNFI was hitting its targets, growing, and earning a lot of cash. In some ways, it seemed like COVID had saved their business, in the sense that the integration wasn't going well. Then they were getting pretty close to hitting their integration targets because of how much they were earning from the pandemic-fueled grocery demand.

That's where things went off the rails again. Rather than actually fixing a lot of the issues that existed prior, management took those boom years as a sign that they had done what they needed to do to get the business into a good place. Earnings started to drop, and it started becoming clear that they were overearning. Fast-forward to fiscal 2024, which for them ended in July of last year: the company actually had negative free cash flow of about $100 million. They went from, "Hey, we fixed things," to all of a sudden, "We're losing money again," and the stock was back down to single digits. It had round-tripped all the way from $5 to $60 and back to around $8.

That's where trip number 2 through the stock started. UNFI brought in a new CFO, Matteo. He is great. He looked at where the business was and said it was time to actually do some of the integration and work that should have been done years ago after the merger. Quarter by quarter, he has been slowly fixing the problems at UNFI. He's been increasing efficiency, closing redundant distribution centers, renegotiating contracts, and the company is finally starting to head back toward its long-term financial targets.

The opportunity here is that a lot of people got burned by the stock twice in the last 7 years. First, going into 2019, when they failed to integrate the merger well, and then again coming out of COVID, when they proved to be overearning from the grocery-fueled boom. There are a lot of people who look at this thing and are very cautious because it has burned a lot of people twice in the last 7 years.

Under the hood, if you look at what they're earning right now, when they first did the merger, they pitched that they were going to be doing $28 billion of sales and $900 million of EBITDA by 2022. They almost got there thanks to the pandemic, but this past year they were doing about $550 million of EBITDA. They are solidly below the long-term targets they set out for themselves. There's still work left to be done, but the signs that the turnaround is taking hold have finally started to appear.

Then, I guess lastly, a month ago, UNFI dropped an 8-K saying, "Hey, guys, we had a cyberattack. Whoopsies. More news to come, but it could be material." I did what most other UNFI investors were doing at the time, which was hop onto the Whole Foods subreddit to see how things were going, as Whole Foods is their primary customer. It became clear that nothing was going out or coming in and that basically the entire network was shut down.

We went from, "Hey, earnings are going to be tomorrow, and I'm really looking forward to this. The earnings report is probably going to be really good," to, "Oh no, the company is not currently functioning." They put out an absolute barnburner of a report the next day. Earnings were amazing. They beat all their estimates, and the stock was down because they couldn't really tell anyone on the call how things were going. They were like, "Hey, we're shut down right now." You know,

Our computers are blue screens. We know as much as you do. Yeah.

So, that definitely increased the uncertainty here, and you don't really know how long or how bad something like that is going to be. Overall, I think they were shut down for most of 10 days. But they've subsequently come out, initially with an 8-K, and then they had an earnings call last week where they went through and quantified the actual impact to them. It turns out it was way less material than you might expect for a distributor being shut down for almost an entire week and a half. So that's the special-situations angle and the backdrop of how we got here.

That's a great overview, and basically everything you said is what I want to pull apart in this podcast, but let's start with the upfront thing. I got a lot of emails when yesterday was July 21st—I always forget my days—saying, “Hey, David's coming on the podcast tomorrow to talk about UNFI.” I got a lot of emails from people saying, “Oh, too bad you missed it by a week.”

Because, as you said, last week on Thursday, they came out with an—well, not an earnings release, an update, updated guidance, and a conference call that said, “Hey, cybersecurity, here's the impact. It's not going to affect our business going forward.” All that sort of stuff. The stock's up like 15% on all that.

So a lot of people were like, “Oh, you missed it.” Forget the “you missed it” part. I just want to ask: As we talk here on July 22nd, do we need to spend more time talking about the cyberattack, or is that kind of behind us at this point?

As far as I'm concerned, it's behind us. I think the company did a pretty good job of putting that to rest. On the one hand, you could argue that there's always a chance they have to come back and say, “Hey, the impact was actually a little bit worse than we thought because of this reason or that reason.” But they're back operating normally. They confirmed no material customer loss on the call, so there aren't any ongoing drags from that. They said it's contained to the fourth quarter, which ends here in a week.

So, as far as I'm concerned, the cyber event is in the rearview mirror now, and it's their opportunity to get back to the story of a turnaround absent that issue.

I think I agree with you. The one thing I worry about is, as you said, Whole Foods is their major customer. For 10 days, UNFI wasn't doing anything because of these issues, and Whole Foods can't exactly say, “Hey, for 10 days, all of our stores are barren,” right? So they find a backup supplier.

In the short term, UNFI has come out and said, “Hey, we're not losing any suppliers.” But the one thing I do wonder—and I don't know the answer to this; I've talked to industry people, and I know you've talked to industry people because we did a call together with at least one—is, in the medium term, if you're Whole Foods or some other big customer, do you say, “Hey, that backup supplier—maybe we need to buy a little bit more from them just in case this happens again”? Or, “Hey, their service was really good.”

We're Whole Foods, which we'll talk about more later. I think their contract now runs through 2032. So, you know, it's 8 years away, and that might be the heat death of the universe as far as a fund is concerned. But do they think, “Hey, that service was really good”? I don't know if there's a medium- or longer-term risk that we haven't adjusted for there. So I'll let you quickly comment on that, then we can dive to maybe more fruitful grounds.

No, and that's a fair question. The short answer is, ultimately, I'm not privy to all those conversations. So I certainly think there is a chance that you see some attrition from that, or people getting a little nervous, like, “Hey, losing my supply for a week and a half was pretty bad.”

I think when you zoom out a little bit, UNFI is not a sole supplier really for any significant number of grocery stores, so most of them already have some level of backup in place. The story UNFI is selling you, if you listen to their call last week, is like, “Look, we executed well on what was a very tough hand, and nobody else is going to be able to come in here and say, ‘Don't worry, we won't get cyberattacked. You can trust us.’” Nobody can fully prevent themselves from being open to something like this.

So while I certainly think this is going to make people reexamine their supply chains, I think this in some ways just highlighted how integral UNFI is to a lot of this grocery supply chain, in a lot of stores around the country, in a way that I just don't think you can get away from them as easily as people might think. There really aren't a lot of alternatives to getting them to do your supply here.

Perfect. Okay, let's switch. I think a lot of the UNFI thesis—not all, but a lot of it—has rested on this turnaround. To my mind, it starts earlier than this, but I think investors really start gaining momentum when, I believe, in October 2024, they come out with this long-term guidance. I think they say, “Hey, this is our fiscal 2027 guidance.” I believe they pull it to fiscal 2026, but you can correct me on any of those dates or any of those numbers.

I'll just finish: They kind of say, “Hey, we're going to hit about $650 million in EBITDA.” Or is it now fiscal 2026? That's kind of the goal that they're setting, right? Please tell me if I'm wrong on any of that before I continue.

Directionally, yeah. They said, “We're going to grow EBIT high single digits. We're going to grow revenues, keep them roughly flat, and we're going to get back to 2.5x leverage by July of 2027.”

So I think the bull case is, hey, they hit this $650 million in EBITDA. This is a quite levered company: about a $1.8 billion market cap and about $1.8 billion in net debt. They pay down some of that debt. EBITDA grows from, you know, $550 million this year to $650 million next year, they pay down some of that debt, and the equity leverage is, wow.

The first question I want to ask: You mentioned they had the cyberattack. The next day, they report blowout earnings and reaffirm the 2026 guidance. Then last week, they come out and say the cyberattack is contained and reaffirm the 2026 guidance. They've now guided 2 times in a row for this 2026–2027 earnings growth. You mentioned Q3 earnings were great. It seems, absent the cyberattack, they've got all the momentum on their side.

I don't believe sell-side has taken any of their numbers up. You were the one who told me, if you listened to the call last week, sell-side sounded almost grumpy that they weren't going to be able to take their numbers down because the company hadn't taken its numbers down. So I want to ask: Why? I also don't think the stock's at $27 because, if people really believed they were going to hit their targets, I don't think the stock would be here. I don't think it would be $27 per share, but I think it would be a little bit higher.

We could talk metrics and all that, but why is no one believing this management team that's guided 2 times in a row and has the turnaround in place? What's the doubt here?

Sure. So I think part of it comes back to the fact that the guys covering this thing have twice seen a story play out where there was a story and then they face-planted. I think the desire to stick your neck out for this company is pretty low on the sell-side.

If you look at the cadence of price targets and earnings upgrades over the last year and a half, as they've really started to pull out of the ditch they were in, it's been very cautious. I get it. I don't begrudge them for not wanting to get burned a third time by this company. If I wasn't as confident about Matteo and the trajectory they're on right now, I would be a lot more cautious too. I feel like they have the right people in place, and those people were not in place previously.

The prior management team signed some pretty disastrous deals. They did a buyback at the absolute top back in 2022. These are guys that did not manage this capital stack well, and shareholders paid for it. They paid for it back in 2019, when the integration went much worse than people expected. So there's definitely that.

I think everybody is cautious. Most of the notes that have come out since the report last week were like, “Hey, cyber is contained. Things are looking up. We'll raise our price target. We'll keep it at neutral, but constructive neutral,” or something—something that kind of sounds like an upgrade but isn't.

So I definitely think there's some interest in and some belief that they're past the worst of it here. But if you go look at the consensus estimate for next year, the company's saying, “Hey, we're going to get to 2.5x leverage within a year,” and the numbers that are out there don't get you there.

For the company to do what it's saying it's going to do and for street estimates to come up, there's some room to meet in the middle here. Someone directly asked about that on the call last week and basically said, “Hey, Sandy, how are you going to get there? How should we be thinking about that?” And he's like, “I've got plenty of ways to get there. I can get my leverage down to 2.5x more than one way.”

So I think earnings are planning to come up.

I think there's going to be some asset sales. There was an interesting 8-K last night where they canned the president of their retail operations. They've been talking about divesting the rest of those for 7 years now.

So you could read into that or not. But there are definitely some different ways here to try and bring the leverage down and hit that long-term target, and I think they've been looking at all of them.

Look, this actually transitions really nicely into my next question. We just asked why no one appears to believe them on the long-term targets. I guess the counter to that question would be: Why is management so confident in these targets?

Because if you look at this business historically, it's grocery distribution, so it's not like you're falling off a cliff and then ramping. We're not talking steel manufacturing or rims for tires or something, but it has had some visibility, and really inflation is a big driver here. With tariffs and everything, I don't think people really have much of a clue where inflation's going.

So I guess the counter would be: Why is management so confident in the visibility in a business that historically has not had that much visibility?

Sure. So I think one of the things that really helps with this business is to just go look at what's out there in terms of competitors. KeHE is the main other natural and organic distributor. A little bit of Googling, even though they're private, and you can find that they run 4% EBITDA margins. And so that's the closest direct competitor to UNFI.

If you go find some S&P credit notes out there, these guys are doing 4% margins. If you go look at SpartanNash, which owns some grocery stores and does grocery distribution and is getting bought by C&S, they do about 2.5%. You go look at Sysco, US Foods, Performance Food Group, and Associated Wholesale Grocers, which is not public but still has some public financials out there. All these food distributors and grocery distributors are doing 2.5% to 3% margins. And UNFI is over here on an island, stuck under 2%.

And if you look at legacy UNFI before their SuperValu acquisition, they were doing 2.5% to 3% unadjusted. You go look at SuperValu, I think they were doing 2.5% adjusted. So all the pieces are out there that you can run a distribution business and earn 2.5% to 3% margins without a whole lot of variability here. And I think this business has been run poorly enough that they are really the only one out there you can look at and say that they're just not hitting that target. There's really no reason they shouldn't be able to get back there.

And I think that gives management a lot of confidence that, look, you can run a distribution business. We're the biggest one. We can run a distribution business at margins that are comparable to our peers. Organic and natural are higher-margin segments, and that is where we specialize. If KeHE can do 4% on lower volumes, why can't we?

It's a really interesting argument because I built this podcast on, hey, they're doing $550 million this year, $650 million next year. This is a business that does—let's just call it—$32 billion in sales to make the numbers nice and easy. If you run that on 2.5% margins, you're talking $800 million in EBITDA; you're not talking $650 million. And if you're talking 3%, you're talking about approaching $1 billion in EBITDA, right?

And you mentioned at their merger—I haven't gone back and looked at their merger decks too closely—but they are projecting $900 million. So it is one of those ones where, hey, no one believes next year's number, but you know what? No one really believes that this business can be kind of average to above average versus peers, and you're certainly not paying for any of that at this price. I'll pause there and let you comment on anything I kind of hit on there.

Sure. And look, I don't want to say, hey, these guys are going to 4% 18 months out. I don't want anyone to come away with that.

Yeah. I mean, let's go get some LEAPS, buddy. Not investment advice. No options or anything, but 4%.

Yeah. No, I brought up the KeHE margins on my last call with these guys. They're like, “Yeah, usually people just want us to get to 2.5%.” And I was like, “Yes, please start there.”

But I think when you look at this, there are puts and takes with these businesses. Whole Foods is over 20% of their sales. You are working with Amazon, who is the distribution king. That is one of the things that's most scary about this business.

People point to Amazon acquiring Whole Foods and then UNFI running out and buying SUPERVALU a year later and say, “Yes, wow, it looks like UNFI panicked, was worried that Amazon was going to cut them out, and went and tried to diversify.”

So there is a legitimate reason to be concerned about being in the distribution business and working for Amazon and thinking, “Wow, that's a very bad place to be historically.” So I don't want to minimize that. I don't think you're going to earn top industry margins doing that.

However, I do think the Whole Foods contract allows them to have a lot of scale and to do higher-margin distribution with other grocery stores in a way that makes the business work. So you want to look at the Whole Foods contract as kind of the anchor to a lot of this network.

I think some of their distribution centers are completely dedicated to Whole Foods at this point. It was over a third of their business, I believe, prior to the SUPERVALU merger. This is a business that has been built significantly around the Whole Foods business. In fact, they don't have any other customers at over 5% of their sales.

So I want to be very clear up front that that is the one main elephant in the room here. That is one reason why margins aren't going to be as high as they could be. So, yeah, KeHE's at 4%, but they're not dealing with Amazon.

On the other hand, like you said earlier, the Amazon contract goes out to 2032 with Whole Foods. We're looking at 7 more years. This has been extended ahead of time every time since the merger. Amazon does not seem interested in trying to run this on a 1- or 2-year timetable and look at cutting them out.

And frankly, it's because I think that they're getting this on a low enough margin basis that there's not a whole lot of upside for them to try and cut UNFI out and do it themselves.

Let me ask on that. I would encourage listeners—if you're interested, and again, this is FinTwit's favorite turnaround, so you should at least have some interest—to go look at the max stock-price chart here. This is a business that went public in 1997. And if you look at the max stock-price chart, it maxes out in early 2015, and I believe that's right before Amazon buys Whole Foods, right?

And since then, it's gone from $75 to $27.50. Look, this is Elmer Fudd stepping on a rake over and over and over again here, right? But I'm looking in 1996—it's trading for $8.50 a share—and today it's $27.50. So that is not a great IRR. I don't believe there were dividends paid in the meantime. So that is a very terrible IRR.

Now, I would just ask you: It seems like Amazon buying Whole Foods changed this business because, again, the stock's come down by 2/3. And yes, maybe Amazon hasn't cut them off, but Amazon always has that hammer of—they love to do everything themselves.

So they always have that hammer of, hey, you guys, we are your anchor customer. You need to do things for us at, forget zero margin, negative margin, just to justify your scale. And if you ever even think about leaving us, we're going to go do this on our own, and we'll do it for other people, and it'll subsidize all sorts of other parts of our business.

So I wonder about that, and I'd love to just talk a little bit more about the Amazon relationship here.

Sure. So, yeah, you make a great point. As I said, I don't think there's anything special they're earning on that contract. Again, you go look at what UNFI does that other distributors don't do. Because obviously they're large, they've survived. What is it about them that they're offering?

Basically, in the natural and organic space, they have, I want to say, over 200,000 SKUs that they say in their annual report they distribute. They have a lot of specialized products. They have a lot of niche products, and it's the kind of stuff you see at Whole Foods. You don't go to Whole Foods to buy your Cheetos; you're looking for organic Cheetos. So they're doing very specialized stuff that doesn't move as fast as some of the bigger mainline distributors.

So if you pull up UNFI's inventory turnover and stack it next to Performance Food Group, Sysco, US Foods, and SpartanNash, UNFI is at the bottom of the pack in inventory turnover. They are very close to the bottom of the pack in revenue per square foot of distribution-center space. So the legacy UNFI business is a little bit higher-margin on the natural and organic side and a little bit slower-moving.

That is kind of their product offering. It's like, hey, you don't really want 50 cases of this niche organic product. You want 2 of them, but we'll consolidate it. We'll break them down. We'll put a couple on your truck, we'll put a couple on your truck, and we'll move it out to you.

The SUPERVALU side of the business is a lot more conventional—just fast-moving, high-velocity. Here's your regular Cheetos.

This is not Whole Foods food. This is your regular grocery store. So that's the UNFI value proposition. That is how the business historically made money. It's how they continue to offer value to be able to distribute into larger chains that have otherwise gone to self-distribution.

If you go look at C&S, which is the main private competitor of UNFI, this is just conventional distribution. They don't do any of the fancy natural and organic. They are, “We will get you your groceries for the lowest price. We'll get them to you the fastest.”

They have gotten hammered over the last few years, just in terms of having a lot of their mainline customers go to self-distribution internally. I think that's the primary reason they're going out and buying SpartanNash right now: to try and plug some of the holes from that lost revenue.

But UNFI is doing stuff that companies don't really want to internalize. It's usually harder stuff to move, more difficult, more specialized, and so that's the niche that they're trying to fit inside of.

No, look, I think you said it well. The one thing that worries me—and I'll come back to stock price, bro, in 1 second—is that you mentioned a lot of this is slower-moving niche products, and generally, in a slower-moving niche product, you should get higher margins, right? People say, “Oh, grocery store margins are 1%,” and that is true: this is a low-margin, competitive business.

But they also turn their inventory over 12 times per year, so they end up getting decent returns on assets. It's not great, but decent. That's how they do it. If you've got a niche product that isn't really moving, you should get higher margins.

And then you look at this: these guys hit the worst of both worlds, right? They have slower-moving assets and lower margins. Maybe that was a prior management team problem, but you look at those two and ask, how did they manage to do niche, slower-moving products and have the worst margins? It's pretty incredible to have that combo.

Yeah. Well, and that again points to prior management issues. I think nothing really highlights how bad things had gotten there more than the earnings call in June, when they announced they were firing Key Food, which at the time was actually their 2nd-largest customer behind Whole Foods.

This was a customer that prior management stole from C&S back in 2021. It was a big rollout during their—again, these are the COVID-boom years—“Hey, we've got Key Food. We're going to do $1 billion of sales with them a year for the next decade, and we're going to have this dedicated Allentown distribution center for them. And look at us, we're growing the business.”

Well, fast-forward to last month, and it's the day after the cyberattack. They say, “Oh, by the way, we were also firing Key Food. We talked to them, and we decided it's better for them to leave rather than us try to rework the agreement.” Yep.

UNFI is paying $53 million to get Key Food to go to someone else. This is an EBITDA-negative contract that they've been working on. So again, when you think about it in terms of margins, here's $1 billion of revenue that prior management went out and signed 4 years ago that has been losing them money even on an EBITDA basis—before capex, before all the other overhead.

There were some really bad things in here. They're cycling out. They've closed 3 distribution centers in the last year and consolidated the volumes into other locations. There's been some very low-hanging fruit where it's like, yeah, they have lower margins because there have been some really bad missteps done in the name of growth or trying to make something work. That's where the opportunity is here: you have a team that's now finally righting some of those past wrongs.

No, it's funny because if we had done this podcast a year ago, all we would have been talking about, I think—I wasn't super closely following this stock—was Key Food and when they would get enough inventory through there, and other customers bolted onto their facilities, to make that contract EBITDA-positive.

And today, it's like we're 35 minutes into the podcast and we just say, “Hey, they casually wrote a $53 million check, plus some other write-offs and stuff, probably $100 million all-in.” They casually wrote it, and nobody even cares about it anymore. They just get it off the books. It's very funny.

Sure.

And they're promising a 1-year payback—or maybe they're estimating a 1-year payback—on cutting them out here. So again, if you want to talk about how much money they were losing on this contract, this is significant potatoes.

You and I—I mentioned we did an expert call together—and there's 1 thing that jumped out to me. I like to end all my calls, especially with former employees, by saying, “Hey, ignore the valuation, but tell me: if I was managing money, or if you were just buying stock, would you hold stock in the company?”

And the former employee we talked to basically said, “Well, yeah, I guess I'd hold stock in UNFI if you wanted exposure to grocery distribution, but I don't know why anyone would want any exposure to grocery distribution. It's a really shitty business, terrible margins. Your customers—you need Amazon, or you need Whole Foods, or you need Albertsons; you need a big anchor customer who just beats the crap out of you for margin all the time.”

So he's basically like, “I just wouldn't want exposure to the sector in general.” I've probably asked this question to 200 former employees, and I've never heard someone say, “I'd like to stay away from the industry entirely.”

So I want to pose that to you. I mentioned earlier: go look at the stock chart. It's basically flat over 20 years. We talked about the margin. You talked about why we want exposure to this industry in general, to this sector. And I'm not saying that in a, “Hey, let's go bet on AI.” I'm saying—

Sure.

We'll talk multiples and everything, but why do we want exposure to this? Isn't this just a shitty business that should trade for something like asset value?

Well, at the end of the day, if it trades for asset value, you'll probably still do okay from here, but that's neither here nor there. Well, let's talk about that. What do you think the asset value is here? How do you estimate that? Because that is 1 thing I was playing around with. I've tried to put it together.

My guess is, if you wanted to go build what they have in terms of distribution network and infrastructure, that would cost you north of $5 billion. I'm not married to that number. I could see it being higher or lower, but ballpark, I would think that the EV here is somewhere around $3.25 billion to $3.5 billion.

I'm confident that if you told me tomorrow, “Hey, go build UNFI,” I could not do it for under the current EV. So—

Let me ask—that's an interesting answer. Let me ask my question a slightly different way. We mentioned the 2026 $650 million in EBITDA number, and people can play around with it, but if you believe that number, the stock, as we talk, in the high $20s per share, is trading for about 5.5 times EBITDA.

And that's cheap, but it's also trading for—if I use about $285 million in capex, which is kind of their LTM number, and you can tell me that's too high—we talk about it trading for about 10 times unlevered free cash flow. So I just threw a lot of numbers out there, but 10 times unlevered free cash flow: if you told me, “Hey, I've got a commodity business—not that great historically, pretty bad returns on assets today”—10 times unlevered free cash flow sounds about right.

Now again, we can pull lots of different pieces apart. You could say they're underearning. You could say the capex is too low. But it did kind of strike me: you jump in and say 5.5 times EBITDA, deleveraging, all this sort of stuff, but when you pull those numbers together, you say, “Oh, it really looks more like it's just very levered, and you get a little bit of inflection, but it doesn't look that cheap on an absolute basis.”

Sure. So I don't disagree with you that 2% margin businesses, 2.5% margin businesses, are tough to own, especially when Amazon's your top customer. So I think there's a population of investors that are never going to own this stock for those reasons, and I am completely fine with that.

It's not going to be a Compounder Bro stock. I don't think it's ever going to be on the 100 Bagger every 4 to 6 months Twitter account.

It probably will not be. What I do think is that everything has a price. I don't think people look at stocks like US Foods and Sysco and say, “Wow, these are really terrible businesses.” They earn good returns on capital. They distribute food, and I think it's possible to do it well, and their margins aren't a whole lot higher.

They are a little bit higher, and I think that's part of the opportunity here. I think UNFI can approach that. But I think it's one of those things where there's a perception, and when they have executed poorly, that kind of reinforces the narrative. I think this business can earn 2.5% even without margin expansion. I think down the road, maybe 3% is reasonable.

I think that, like you said, $285 million to $300 million of capex a year is probably about the right number. I don't think that's super high or super low. I think long term they can keep it around that level. If you look at historically what they've spent, there were also, I think, 63 distribution centers when they did their merger, and they're getting close to 50. So they've been slowly reducing the footprint while growing sales and getting their inventory turns up.

They've been getting their sales per square foot up by closing stores and increasing sales. So I think they're doing the right thing to make this footprint more efficient. And, yeah, $300 million of capex on $650 million of EBITDA really does eat into your cash conversion. But when that EBITDA number is $750 million or $800 million, which I think it can be a year or 2 from now, the $300 million of capex is still there.

By the way, the interest expense is going to be more reasonable because you've gotten your debt down by $1 billion over the last 6 years, and I think they're going to get down by another few hundred million in the next 12 months. Then you're going to refinance your term loan, which you're paying 9% on right now, down to 6%, in line with the rest of your cost of capital. Suddenly, your cash conversion looks really good, and if you're throwing off $300 million of cash flow every year, buying that for $1.6 billion doesn't seem so bad.

It's a steady business. I think grocery is a defensive space to be in. When it's run well, people don't get as concerned about it. Because you've got COVID in there and you've got a merger, there's just a lot of noise in the numbers for what should be a pretty steady, boring business.

I think UNFI screens like it's a lot less stable of a business than it has been. If they can show the Street, “We're actually a pretty stable company. We can generate a decent amount of cash flow, we have valuable assets, and we can thoughtfully allocate that capital rather than making more boondoggle acquisitions,” then they will get a higher multiple and be able to put that cash to work at reasonable rates of return.

I think the numbers you threw out are very interesting in several respects. The one I think about, again, when I look at a business that I think is a cost-of-capital business—and that's what I ultimately think grocery distribution is—I find the best way to look at it is replacement value of assets.

If you believe your $5 billion replacement value of assets number, which I think you said you couldn't replace them for $5 billion, so it would be higher, that number would jibe very well with the numbers you talked about. $800 million in EBITDA as a medium-ish target, less $300 million of capex, comes out to $500 million in unlevered free cash flow. That's a 10% return on replacement value: $500 million divided by $5 billion. That's obviously a pretax number. After tax, you're talking about a 7.5% return.

That feels about right for replacement cost—for a return on replacement cost for a commodity business. I do think it's interesting that you're buying the whole package for $3.5 billion to $3.75 billion, while you're saying replacement cost is above $5 billion. There are multiple ways this can work out, but that's kind of how I think about it.

I think it's interesting because you get a business trading below replacement cost, with a management team that's saying, “We've got the turn coming.” They're still not even earning their cost of capital if they hit their target. I think all that's interesting. I have some other questions, but I just threw a lot of rambling out at you. Please comment on anything I said, or anything I missed, and elaborate on anything you want to.

Sure. Look, I don't disagree with that framing at all. Again, I'm not super married to one number or the other here. If you told me, “I think it's going to cost $4 billion to replace these assets,” and I said $5 billion, I'm not going to lose sleep fighting you about that. I came up with an estimate, and you came up with an estimate. To actually go hire 25,000 people and open 50 distribution centers, good luck. Startup costs on that sound pretty challenging.

Again, if you're one of their customers here and you want to internalize this, they're earning 10% on it with all these customers in here, but if you want to try to internalize it, your overhead is going to be higher relative to what you're doing. I just don't see anyone else—no one else has their scale. No one else is going to be able to just go out and build this at an attractive enough cost to say, “Yeah, I'm going to go try and steal this—whatever it is, $500 million to $800 million of EBITDA—at this cost.”

I don't think that appetite exists. I also think that is worth something, and that something is probably more than where it's trading right now. I think it's a steady business. You also are going to start having the conversation: “Hey, if they hit their leverage target next year, running this business with 2 to 2.5 times leverage is a pretty reasonable range.”

Then you start looking at it like, “All right, are they going to be able to start paying a dividend?” If there's $300 million of free cash flow in this business long term—even if there's $200 million—that would be north of a 10% yield at today's price that they could start returning to shareholders through buybacks and dividends. Maybe there are some tuck-in acquisitions they want to do, and given the way this team is allocating capital, I'd be more interested in that.

But I think the key here is that you look at it and say, “These things have a price.” I think the current price is too low. Yes, it's a low-margin business. Yes, a former employee may not want to buy it here because he thinks it's a tough business. But it's a very necessary business, it's a defensive business, and I think it's finally going to show some stability after years of struggling to do so.

That's perfect. Let's talk about inflation real quickly. Distributors generally benefit from inflation, though not always, right? The reason is simple. If you buy a banana today as a distributor and a week from now you're going to put it into a grocery store—hopefully faster than that for a banana, but something like that—if the prices of bananas go up 20% between now and then, you just wind up with a 20% margin windfall. If prices go down 20%, you just wind up with a loss.

I'm obviously simplifying there, but in general, inflation is good for distribution and deflation is bad. So it's tough to buy this business without some view on inflation. I'm not saying you have to be a macro trader, but if you told me, “Andrew, I think we're going to have 10% deflation and we're going into gold, cans, and guns town,” I'd be like, “Hey, maybe let's not buy the distributor. Maybe let's not buy anything.”

It also strikes me that they could have a windfall. Tariffs cause inflation really quickly, so they could have a huge windfall there. Inflation does seem to be a little sticky. Do you have any views on inflation, or any concerns about inflation here?

Yeah. If you go back and look at some of their comments at UNFI, KeHE, and SpartanNash over the last few years, they all talk about how inflation gave them an earnings boost to some extent. It's not a whole lot, but when you're doing $30 billion of sales, if prices inflated by 0.5% while you had the stuff, you're running a business with 2.5% margins—that's a 0.5% margin boost.

So there's definitely some margin to be had there. I don't have a really strong view on the macro question of whether we'll have deflation in the next year. If I were going to be more worried about hedging something for my portfolio, it would be reaccelerating inflation, and I would want to own this in that case over a lot of other things. If I think about what I'm more afraid of, that's probably how I would want to be positioned. It's a defensive business in that regard.

I want to wrap up with consolidation. You mentioned C&S Wholesale Grocers buying SpartanNash, and I had a few people reach out to me. They were wondering, “Hey, I don't know if this is a risk. I don't know if this is an opportunity.”

You could say it's a risk because you've got 2 pretty big businesses merging, and the bigger business might try to poach some customers or something like that. Or you could say it's an opportunity because you know exactly what happens in UNFI when C&S and SpartanNash are integrating: They might take their eyes off the ball.

Or hey, what if they have a little divestiture package they need to put out that UNFI can acquire for a song? So, you could tell me any of them and I’d believe you. I’d love to just—I mean, it doesn’t have to be C&S and SpartanNash specifically, but just the industry consolidation. How do you view that for UNFI?

Sure. So, C&S and SpartanNash are more traditional mainline distributors. SpartanNash has a decent-sized retail business. I think they have over 100, maybe 200, retail banners in their portfolio. So they actually own some grocery stores. UNFI has about 75, so it’s a small piece of the business.

But one of the ways that these distributors have been evolving has been acquiring some retail banners and distributing into their own stores. I think I mentioned earlier that UNFI is more likely to try and exit that line as opposed to wanting to grow it. But if you go look at C&S for the last couple of years, they have been rumored to be connected to just about anything that was retail-banner divestiture-oriented.

The Kroger-Albertsons deal—C&S was trying to acquire stores that needed to be sold as part of that deal. They got linked to another—I think it was a Piggly Wiggly deal at one point. Now they’re going out and buying SpartanNash, which has both the distribution and the retail-banner component.

So I see a C&S that has lost 2 huge customers in the last decade that went to self-distribution and is just looking to buy something to try and help keep their business afloat. So I look at them more like buying UNFI in 2018 after they overpaid for SuperValu than I would as an opportunity—as a risk to UNFI that they’re going to come in here and start doing anything really negative for us.

I think, frankly, on the contrary, UNFI will probably be better with C&S being a little bit more stable and a little bit less desperate to go win customers because they’ve bought some margin and have a larger, more stable company. So I would rather them be focused on integrating that than going out and trying to steal UNFI’s customers by underbidding them and driving everyone’s margins into the dirt.

No, it makes sense. A lot of times, an investment thesis can be boiled down to one thing. If you had a kind of irrational competitor and they get taken out for any reason, right? They can go bankrupt or a rational competitor buys them. This is a kind of oligopoly industry—you get a little bit closer to an oligopoly, and returns tend to go up. So I think it’s much more opportunity than risk for them if it kind of falls that way.

Actually, I do have one more question, and then we can do any closing thoughts that you have. I look at this board, and this is just because I’ve been on an activism kick lately. I’ve been looking at, as you and I have texted on and off a few times, these really crappy biotech companies where the whole board owns 10 shares combined, and all of them get paid $300,000 a year, and between them, they might own $4,000 worth of stock.

When I look at this board, I don’t see any huge shareholders, right? I mean, James Pappas, who I don’t know but who has, I think, a pretty good reputation, owns almost 500,000 shares. That’s meaningful money, but it’s not crazy. Most of the directors own, let’s call it, $500,000 worth of shares, and they get paid about $300,000 per year to be on this board.

So I look at this and I say, “Hey, a lot of the directors have been here since the mergers that went bad, some bad deals and everything. A board member since 2019, a board member since 1996—there’s been a refresh.” But I kind of look and say, “Hey, is this a little bit of a sleepier board? Maybe they don’t allocate capital the way you want. Maybe they’re not as— a lot of them were here when it got to the point where it needed a turnaround.” How do you look at the insider ownership here?

Yeah, no, it’s definitely not as high as you’d want to see. I mean, Papas ran an activist campaign with a little bit less than 1% of the stock and got on the board.

Which is incredible. I mean, I’ve owned more of the companies than that, and they’ve been like, “Fuck you, man. Who are you?”

Yeah, no, he got in there. So, relative to the capital that he’s managing, it’s a significant position. He’s got a pretty good track record. I run into him quite a bit in other ownership tables. So we don’t have a personal relationship, and we haven’t talked about this investment, but I think he’s got a pretty good reputation in this space.

I think his involvement is one of the good signs for me. Yeah, it’s an activist. Yeah, it’s not a huge position relative to the total cap stack. But you’ve got somebody in here who is advocating for shareholders, doing the right things, and has made some noise. I think that helps offset some of the sleepier concerns that you pointed out.

I think without him in there, I would be more concerned. I think you can go look at the last proxy, but they’ve reworked some of the executive incentives here to be a little bit more shareholder-aligned. Prior compensation was definitely dilutive to investors. You go look at the share count—I think it went up 20% over 2 years, between 2020 and 2022, just from very heavy stock-based compensation when the price was low.

So it’s always a tough needle to thread. Everyone wants insiders to own a ton of stock that they paid a ton of money for, and the company doesn’t give them anything. At some point, you do actually have to incentivize your people, and not every company has huge insider ownership.

But I do think the incentives here are pretty well aligned, and I do like the presence of an activist on the board and the steps that have been taken. It’s been very shareholder-friendly, and so I can get over it. But I would rather that the insiders came out next week and bought millions of dollars’ worth of stock in the open market and got even more aligned.

There’s been enough stuff going on that I don’t know how unlocked some of these guys are to even be able to do that. Obviously, in the middle of a cyberattack, I’m sure these guys would have loved to come out and buy stock at $21, but there’s been a lot happening.

So I think that’s one of the valid points. You can go look here and say total insider ownership is about 2.5%, and for a $1.6 billion company, that’s on the low end. You would like to see more than that, and I would like to see more than that, but I get comfortable with an activist and with the incentives that are in place for management.

No, I generally agree. I think you and I are aligned. We’d love to see boards where every director owns 1% of the company and there are 2 6% shareholders.

And particularly directors—I just can’t believe there are directors who will go on a board for 10-plus years and, at the end of it, own no stock. I’ll talk to them, and they’ll be like, “Every director I’ve ever worked with is completely focused on shareholder value and building shareholder value.” And you’re like, “If that was true, they’d at least hold on to some of these shares.”

These guys treat it like cash. They’ll tell you stock comp is not real comp. You can ignore it, but they sure as hell treat it like cash. As soon as that thing vests, it’s out of their account and into the money market funds.

Yeah.

Look, I think we’ve done—not to pat ourselves on the back—I think we’ve done a nice job of preparing and talking through all the things that, at least for me, I thought were pertinent. But I just want to pause for a second. Anything else you think people need to be hearing about or thinking about with UNFI? What should listeners be thinking about if they’re thinking about UNFI?

Look, overall, it’s one of those stories where everything has a price, and I think this company is more stable and has more earnings power than people realize. I think it’s being managed the best it has been in the last decade, maybe ever, but I have less of an opinion on the time prior.

You’re not going to tell me about how they were performing in the glory days of 1997?

There’s a director you can call for that. But, yeah, they were a steady 2.5% to 3% margin business pre-acquisition of SuperValu. It was a face-plant. Exiting COVID proved that margins were less durable than they thought. They got a lot of one-time inflation and shutdown benefits.

Look, I think they’re finally doing the hard work to get this business back to what it should be, which is a minimum 2.5% EBITDA-margin distribution company, like every other distribution company. So I think the easy part of the thesis is that this can be done because everyone can do it that distributes food except for this company.

Everyone else has been able to figure it out, and these guys are finally doing the work to get there. I don’t see anything structurally about the business that means they can’t do that, given that both UNFI and SuperValu have shown in the past they can do it, and that smashing them together did not result in them doing it somehow better.

But we’re getting there. We got a cyberattack in the middle of it, and they’ve dodged that bullet pretty well and, from what I can see, handled it better than I expected.

So I think it’s interesting. I think it’s durable. We didn’t really talk about it, but grocery distribution is a pretty defensive space for recessions and things in general. So, again, it protects me from inflation and from recessions. Go look at their investor presentation on their website right now. They’ve got a really interesting chart where they show grocery demand by quarter and through the last 3 recessions.

I think they’re telling the story better than they have been. I think they’re executing better than they have been. A lot of people got distracted by the cyberattack, and if you look at where this thing was trading 2 days before the cyberattack and at the earnings report they put out, we’d probably be sitting somewhere around $35–$37 a share, and we’re at $27. So if you feel like you missed it, I would point you to that.

I don’t know how the stock’s going to trade in the short term, but I feel really good about what they’re doing and how they’re executing. I think, going forward, they’re going to surprise to the upside relative to where estimates currently are.

Speaking of surprises, I have one last surprise question for you. I’d be remiss if I didn’t ask this. They launched the—I believe it’s the Simplified Supplier Agreement—where they started charging fees in early 2024, mid-2024; I can’t remember exactly.

Yep.

Does that—it seems like that rollout in the past—does that give them more visibility, just from the fact that they’re charging all of those fees and everything? I think it’s different, but does this program just give them a little bit more visibility in the way they’re charging, do you think?

So, yeah, there are 2 pieces of that. This got talked about a lot, like you said, last year, in a few different corners of the value-investor world. There are 2 fee structures they have on the supplier side. One was the one that you’re talking about. It got a lot of press, which is the Simplified Supplier Agreement that they did.

Basically, normally they charge the suppliers a 1.5% fee on the product they’re selling into the business. Then there was just a huge laundry list of other things suppliers could opt in or out of: “Hey, do you want to get data on how your product’s doing in grocery stores? Hey, do you want to get this access to that?” There were all sorts of add-ons and nickel-and-dime charges.

UNFI canned that and went back to those suppliers and said, “Hey, this is now going to be just one flat 2.5% fee, and you’re going to get all these things whether or not you were paying for them previously.” What does that mean for that? That was probably 90% of the suppliers they work with, but these are the smaller suppliers. The way management framed it to me was that’s about 20% of the volume that they push through their distribution centers.

You think of that as 20% of the stuff going from 1.5% and change to a flat 2.5% fee. They’re adamant that they can show their suppliers they’re getting their 1% of value by giving them better data and helping them sell their products better. That’s their story, and they’re running with it.

If you go look at KeHE’s, I believe theirs was either 2% or 2.5% already. So this isn’t an industry difference. This is kind of them coming up to that industry standard. They’re offering services to these companies; it’s not just, “Hey, we’re raising our fee on you and you don’t get anything in return.”

That was one of the things that’s in the margins, but I think that was only about 20% of their product. My guess is that somewhere around $50 million of EBITDA improvement is going to come through those contracts lapping.

The other side of that is they have these supplier agreements with their top 10% of suppliers, which are about 80% of their volume. Those are one-by-one negotiations. They don’t go to those guys and say, “Hey, here’s your new fee.” It’s, “Hey, previously you guys were at 1.25%, and we’d like to go to 1.5%.”

The top 10% of their suppliers are 80% of their volume, so they all have more specialized agreements. That has been worked through and has probably gotten less press overall.

That’s the overview of how that’s worked, and that is going to be a tailwind, I think, for earnings. There might have been some stuff that came out about that that got a little bit oversold in terms of how much of a boost this was going to be for their margins, but it is material. It’s part of how they’re trying to work more closely with their suppliers to help them sell better.

Given how things have gone so far, they seem to be selling that pretty convincingly. I haven’t seen evidence of supplier attrition in their results. Most of that, I think, is already kind of working its way into the numbers and lapping in the next 12 months. That’s what’s going on with that piece.

Perfect. Well, I’m sure people wanted to end with a discussion of supplier fees and everything. That’s the stuff that people really listen to this podcast to get excited about.

David Bastian, one of my favorites to have on. I’m going to go review how many podcasts we’re on. You’re getting close to the Yet Another Value Podcast shirt. I appreciate you coming on. Looking forward to chatting soon, and we’ll go from there.

Sounds good. Thanks, Andrew.

Later, buddy. A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial adviser. Thanks.