UNFI Faces Shareholder Class Action Over Allegedly Misleading Cost Savings Program

United Natural Food Inc. (UNFI) is facing legal action from shareholders after allegedly providing false and misleading financial information following the roll out of its Value Path cost savings initiative, launched in the wake of pandemic-induced supply chain volatility.

On March 20, UNFI investors filed a class action suit in the U.S. District Court of Southern New York, claiming that the distributor’s CFO, John Howard, as well as former CEO Steven Spinner and current chief executive Alexander “Sandy” Douglas, provided misleading information regarding the company’s gross profits and operating expense reduction plans in the face of continued inflationary headwinds between March 2021 and March 2023.

According to the complaint, following the Value Path initiative roll out in Q1 FY21, UNFI’s executive leadership team told investors during earnings calls that the cost savings generated by the program would be reinvested into technologies to help manage and predict supply chain disruptions and lower the company’s cost structure. The distributor estimated that the program would result in $70 to $100 million in cost savings by the end of FY23 and “contribute to future bottom line growth, margin expansion and generate meaningfully incremental free cash flow,” according to a Q1 2021 earnings report.

However, during the company’s Q2 2023 earnings, two quarters ahead of when investors had been told those savings would be realized, UNFI reported that gross profits fell by $6 million, despite a 6% increase in net sales. Executives attributed that performance to lower than expected procurement and inventory gains amid supply chain volatility and “rapidly accelerating inflation.” Following that earnings release, UNFI’s stock price dropped $11.49, over 28%, to a low of $22.07 per share, which plaintiffs claim caused injury to all UNFI shareholders.

“Because of [the defendant’s] positions and access to material non-public information available to them, the Individual Defendants knew that the adverse facts specified herein had not been disclosed to, and were being concealed from, the public, and that the positive representations which were being made were then materially false and/or misleading,” the complaint states.

Following Value Path’s activation through June 2022, the distributor reported positive gross profit rates, gross margin improvements and consistent, incremental net sales growth in each of UNFI’s quarterly reports and corresponding SEC forms. In Q3, gross margins decreased 0.5% to 14%, but rebounded in the subsequent quarter. The company also provided updates on its ability to hedge against inflation, stating in its Q1 2022 earnings report that improvements to its wholesale segment’s margin rate, a goal of Value Path, helped offset the impact of inflationary pressures.

“Our business is characterized by low margins, which are sensitive to inflationary and deflationary pressures, and intense competition and consolidation in the grocery industry, and our inability to maintain or increase our operating margins could adversely affect our results of operations,” UNFI said in a 10-K SEC filing in September 2022.

The complaint alleges that the financial information in question is not protected by the safe harbor of forward-looking statements, provided by UNFI alongside the release of the earnings statements, as the financial results in question were supported by sales and margin rates.

Upwards of seven law firms across the country have filed additional securities class actions on behalf of individuals who have purchased or acquired UNFI securities between 2021 and 2023.

UNFI did not respond to requests for comment.

This article has been corrected to accurately reflect UNFI’s stock price following the release of its Q2 FY23 earnings.