United Natural Foods (NYSE:UNFI) reported stronger third-quarter fiscal 2026 profitability and cash flow despite lower sales, as management said network optimization, productivity initiatives and supply chain investments continued to reshape the business.
On the company’s earnings call, CEO Sandy Douglas said UNFI made “steady progress” on its value creation strategy, which is focused on adding value for customers and suppliers while making the company more effective and efficient. He said the company generated “strong profitability and free cash flow” during the quarter while strengthening its balance sheet and improving financial flexibility.
Excluding optimization actions and the project-related work, Tarditi said the underlying business performed in line with the company’s estimated target addressable market and outperformed the overall industry.
Profitability Improves as Expenses Decline
UNFI’s gross margin rate rose about 20 basis points year over year to 13.6%, helped by network optimization work. Operating expenses declined nearly 7% from the prior-year period, while the operating expense rate improved by nearly 40 basis points to 12.4% of net sales.
Tarditi said distribution center productivity increased by more than 7%, reflecting the benefits of efficiency initiatives, network optimization, next-generation supply chain investments and lean practices across the company’s network.
Adjusted EBITDA rose nearly 17% to $183 million. Adjusted EBITDA margin was approximately 2.4% of net sales, up about 40 basis points year over year. Adjusted earnings per share increased to $0.77 from $0.44 a year earlier, helped by higher profitability, lower net interest from reduced debt levels and lower depreciation expense.
The company generated $54 million in free cash flow during the quarter, bringing year-to-date free cash flow to $243 million, up $90 million from the prior year. Net leverage declined to 2.5 times, an improvement of 0.8 times year over year, while net debt fell to $1.63 billion, which Tarditi said was the lowest level since fiscal 2018.
Natural Products Remain a Growth Driver
Management highlighted continued strength in natural, organic, fresh and specialty products. Tarditi said natural product sales grew by more than 4% in the quarter, even with the impact from the unwind of project-based work. He said underlying natural growth again outperformed the market, reflecting customer execution and ongoing shopper demand.
During the question-and-answer portion of the call, Tarditi said the sequential slowdown in natural growth from the prior quarter was driven by roughly 200 basis points of impact from the unwind of project-based work. He added that natural product growth on a two-year stacked basis has been in the mid-teens for five consecutive quarters.
Conventional product sales declined nearly 14%, primarily due to strategic network optimization actions. Tarditi noted that although the company reports segments by product type, approximately 90% of its customers buy both conventional and natural products.
Retail sales fell about 10%, largely due to planned store closures as UNFI optimizes its footprint. Same-store sales declined about 4%, which management attributed to a dynamic environment and a changing pharmacy backdrop. Tarditi said Cub’s food-driven same-store sales improved sequentially, and the company remains focused on enhancing Cub’s value proposition, assortment and shopping experience in Minnesota.
Management Points to $90 Billion Target Market
Douglas said UNFI is focused on supporting differentiated regional and independent grocers, natural and organic retailers, multicultural grocers and neighborhood grocers. He said these retailers form the basis of the company’s value creation strategy and define what UNFI sees as a growing $90 billion target addressable market.
According to Douglas, differentiated regional and independent grocers have roughly doubled their share of the approximately $1 trillion U.S. grocery retail market over the past two decades, while natural and organic retailers have tripled their share over the same period.
“Differentiated formats have generally outperformed the broader market over time,” Douglas said, citing consumer interest in high-quality and healthy assortments as well as differentiated shopping experiences.
Douglas said UNFI’s underlying net sales performance, excluding accretive optimization, was in line with low single-digit growth in its target addressable market. He also said the company has a “very strong” pipeline, though management did not provide specific customer win details.
Supply Chain and Technology Investments Advance
Management said UNFI continued to invest in seven key capability areas: customer stewardship, merchandising and supplier support, professional and digital services, private brands, technology, next-generation supply chain and productivity.
Douglas said UNFI rolled out a digital marketplace called Endless Aisle during the quarter, intended to give retailers easier access to emerging brands and help suppliers expand their reach. He said early partner feedback has been positive.
The company also introduced more than 30 new private brand SKUs, which Douglas said are aimed at helping retailers differentiate assortments and meet demand for nutritious options.
UNFI expanded its AI-powered supply chain and procurement planning platform to all distribution centers and is working to complete the supplier-facing portion of the rollout. Douglas said the platform is helping improve fill rates, inventory management and free cash flow conversion. The company also expanded the use of Samsara, an AI-powered fleet management platform, to support driver coaching, route optimization and delivery execution.
Year to date through the third quarter, on-time deliveries increased by more than 4% from the prior-year period, while average miles per delivery declined by nearly 5%. The company also expanded its cloud-based warehouse management system to five additional distribution centers.
Outlook Reiterated as Fuel Costs Remain a Watch Item
UNFI reiterated the midpoints of its fiscal 2026 outlook metrics and narrowed expected ranges for net sales, net income, EPS, adjusted EBITDA and adjusted EPS. Tarditi said the company continues to expect investment spending to ramp in the fourth quarter to support supply chain improvements and customer and supplier service initiatives.
During the call, Tarditi said the company remains in “high confidence mode” regarding its outlook, while embedding expected pressure from fuel and transportation costs into the fourth quarter. He said UNFI manages fuel exposure through hedging, contractual protections that share some fuel pressure with customers and transportation route optimization.
Management also addressed inflation, saying food inflation has been in the low single digits year to date and is expected to remain in that range through the end of fiscal 2026. Tarditi said the company works with suppliers and customers to keep prices “low, stable and predictable.”
Looking ahead, Tarditi said UNFI expects its broader wholesale business to return to sales growth in fiscal 2027 as it cycles larger optimization actions in the first quarter of that year. Douglas said the company’s long-term model is based on low single-digit sales growth, high single-digit adjusted EBITDA growth, reliable free cash flow generation and improving returns over time.
About United Natural Foods (NYSE:UNFI)
United Natural Foods, Inc (NYSE: UNFI) is a leading distributor of natural, organic and specialty foods in North America. Founded in 1976 and headquartered in Providence, Rhode Island, the company has grown through strategic acquisitions and organic expansion to become one of the largest food distributors serving retail, foodservice and e-commerce customers.
UNFI’s core business centers on the procurement, warehousing and distribution of a broad portfolio of products, including fresh produce, groceries, frozen foods, dairy, bakery items, beverages, supplements and household essentials.
