Class-action suit accuses UNFI of misleading investors

Investors have filed a federal class-action lawsuit against United Natural Foods Inc. (UNFI), claiming the grocery distributor violated U.S. securities laws by failing to disclose key business information, which ended up pulling down its stock price.

The suit, filed March 20 in U.S. District Court for the Southern District of New York by Dan Sills, a UNFI shareholder representing other investors in the company, names current UNFI CEO Sandy Douglas, current CFO John Howard and former CEO Steven Spinner as defendants.

Providence, R.I.-based UNFI declined to comment on the lawsuit when contacted by Winsight Grocery Business.

At issue in the suit are year-over-year declines of $6 million (-0.6%) in gross profit and over 71% in net income and earnings per diluted share that UNFI reported on March 8 for its fiscal 2023 second quarter, which ended Jan. 28. The plaintiffs noted that the decreases came “despite a 6% increase in net sales” (reported as 5.4% by UNFI).

In addition, the suit pointed to a statement from Douglas in the Q2 press release: “Profitability in the quarter was lower than recent levels and our plan. Profits were challenged as we did not repeat the significant level of procurement gains from rapidly accelerating inflation and inventory gains, due to supply chain volatility, that we experienced in the second quarter of last year. As a result of these challenges, we are reducing our profitability expectations for fiscal 2023 and withdrawing our fiscal 2024 targets.”

UNFI released its Q2 results before the market open on March 8. Its shares, which closed the previous day at $40.96, opened on March 8 at $26.61 and ended the trading day at $29.47, down $11.49 or 28.1%, “thereby injuring investors,” according to the suit. Since then, UNFI’s share price has hovered in the low to mid-20s.

Under the class action, covering shareholders for the period of March 10, 2021, to March 7, the investors claim UNFI didn’t come clean with shareholders about the business.

“Throughout the class period, defendants made materially false and/or misleading statements, as well as failed to disclose material adverse facts about the company’s business, operations and prospects,” the lawsuit stated. “Specifically, defendants failed to disclose to investors: (1) that, despite its cost-saving ‘Value Path’ initiative, United Natural Foods had not invested in improving its data management and related infrastructure; (2) that, as a result, the company could not respond adequately to cost changes, such as inflationary pressure; (3) that, as a result, the company could not appreciate the benefits of procurement gains and inventory gains achieved during fiscal 2022; (4) that, as a result of the foregoing, the company’s profitability would be materially adversely impacted; and (5) and that, as a result of the foregoing, defendant’s positive statements about the company’s business, operations and prospects were materially misleading and/or lacked a reasonable basis.”

Spinner, who was succeeded by Douglas as CEO in August 2021, had announced the Value Path strategy on Dec. 9, 2020, in a Q1 2021 earnings call with analysts.

“We began evaluation of this next phase of initiatives, which we’re calling ‘Value Path,’ a year ago. Value Path is a holistic approach to driving more value throughout our business, including across key elements of pricing, procurement, operations and administrative functions,” Spinner explained in the call. “We believe these initiatives will drive an additional $70 million to $100 million by the end of fiscal 2023 and contribute to future bottom-line growth, margin expansion, and generate meaningfully incremental free cash flow.” (Call transcript provided by AlphaSense.)

The lawsuit seeks compensatory damages to be determined at trial, as well as legal costs and fees.

Law firms began announcing investigations of UNFI the day after its March 8 Q2 earnings report and started seeking participants in the class-action suit on March 20. The suit document lists Glancy Prongay & Murray LLP (New York) and the Law Offices of Howard G. Smith (Bensalem, Pennsylvania) as attorneys for Dan Sills.