Core Insights - The natural foods sector is the primary growth driver for United Natural Foods Inc. (UNFI), compensating for weak performance in conventional grocery sales during Q1 2026 [1][2] Financial Performance - Net sales in the natural and organic segment increased by 10.5% year over year, exceeding $4.2 billion, while conventional sales fell by 11.7% [2] - Retail sales declined by 5.5%, and same-store sales decreased by 3%, attributed to store closures aimed at strengthening the network and improving cash flow [2] - Consolidated net sales growth was reduced by approximately 3% due to the closure of a distribution center in Allentown, PA [3] - The company maintains an annual sales outlook between $31.6 billion and $32 billion, with net income potentially reaching $50 million [4] Strategic Initiatives - UNFI is focusing on enhancing its private-label business, with the recent hiring of Pamela Ofri as chief brands officer to drive growth in this area [5] - The implementation of Lean Daily Management in 34 out of 49 distribution centers aims to improve operational efficiency and reduce waste [6] - The deployment of the AI-powered supply-chain management platform, RELEX, in about half of UNFI's distribution centers is expected to enhance fill rates and inventory effectiveness [7] Customer Engagement - Customer appeal rates have improved and are now above the levels seen in 2024 and 2025, indicating a positive trend in customer engagement [8] - Fill rates are also on the rise, contributing to better service delivery [8]

Financial Data and Key Metrics Changes - The company achieved a sales growth of 7.5%, amounting to approximately $8.1 billion, with adjusted EBITDA growth of 21% to $157 million, marking the highest adjusted EBITDA margin rate in two years [19][25][10] - Free cash flow for the quarter was $190 million, significantly higher than the previous year's $70 million, contributing to a year-to-date free cash flow of approximately $150 million [25][10][26] - Net leverage decreased to 3.3 turns, down 1.3 turns from the previous year, with expectations to reach 2.5 turns by the end of fiscal 2026 [25][26][10] Business Line Data and Key Metrics Changes - Sales in the wholesale natural products business increased by 12%, while the wholesale conventional products business grew by nearly 3% [19][20] - Unit volumes across the wholesale business rose by about 4%, indicating a sequential acceleration in performance [19][20] - Retail business sales showed slight growth, with same-store sales up 1.5% [20] Market Data and Key Metrics Changes - Inflation remained stable at approximately 1.5%, contributing to the sales increase alongside a favorable product mix [20][19] - The natural products segment outperformed conventional products, growing at 12% compared to 3% for conventional [80][19] Company Strategy and Development Direction - The company is focused on optimizing its network and reducing capital spending while enhancing operational efficiency [12][13] - A strategic decision was made to exit the unprofitable relationship with Key Food, allowing for better service to remaining customers and optimizing the Northeast distribution network [12][38] - The company aims to continue driving consistent annual margin expansion and free cash flow generation, with a focus on building win-win relationships with suppliers and customers [10][11] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the challenges posed by a dynamic macroeconomic environment but expressed confidence in the company's ability to support customers and suppliers [11][10] - The company is committed to transparency and customer service during the ongoing IT systems security incident, which has impacted operations [7][8] - Future financial objectives will be updated after the fiscal 2026 budgeting process, with a focus on long-term sustainable value creation [16][17] Other Important Information - The company reported an incident of unauthorized activity on its IT systems, prompting a response plan and operational adjustments to maintain customer service [7][8] - The company is actively working to restore its systems while managing customer needs through alternative means [41][42] Q&A Session Summary Question: Clarification on guidance for non-GAAP elements - Management reiterated that guidance remains unchanged due to the ongoing IT incident, despite strong year-to-date performance [31][35] Question: Insights on the Key Foods relationship - Management explained the decision to exit the Key Foods agreement was based on operational challenges and profitability assessments [36][38] Question: Current shipping capabilities post-incident - Management confirmed limited shipping is occurring, with ongoing efforts to restore full capabilities [41][42] Question: Impact of the cyber incident on customer contracts - Management emphasized a focus on meeting customer needs rather than contractual obligations during the crisis [46][47] Question: Long-term implications of Lean Six Sigma initiatives - Management expressed confidence in sustaining productivity gains despite temporary disruptions from the cyber incident [62][66] Question: Customer response to the cyber incident - Management reported constructive and collaborative conversations with customers, focusing on meeting their needs during the crisis [57][58] Question: Future CapEx and technology spending post-incident - Management indicated that while cybersecurity investments will be prioritized, overall capital spending strategies remain unchanged [85][86]