UNFI (UNFI) Q4 2025: Natural Segment Grows 9% as Strategic Plan Drives Margin Expansion
UNFI’s Q4 results underscore a decisive pivot to higher-margin natural and organic growth, with disciplined execution across network optimization and cost control. Margin expansion and free cash flow outperformance signal the company’s multi-year transformation is gaining traction, positioning UNFI to accelerate deleveraging and reinvest in automation and digital services. Updated guidance and raised multi-year targets reflect management’s confidence in durable demand and operational leverage heading into fiscal 2026.
Summary
- Natural Segment Momentum: High single-digit natural growth outpaces conventional, cementing category leadership.
- Margin Expansion Focus: Lean initiatives and network optimization drive meaningful operating leverage and lower capital intensity.
- Deleveraging Accelerates: Strong free cash flow enables faster debt reduction and supports reinvestment in automation and digital services.
Performance Analysis
UNFI delivered Q4 results in line with revised outlooks for sales, adjusted EBITDA, and EPS, while free cash flow outperformed expectations and enabled a reduction in net debt to the lowest level since 2018. Net sales growth of 1.6% (excluding last year’s extra week) was driven by the natural segment’s 9% increase, which more than offset declines in conventional and the impact of a cyber incident. Conventional segment sales fell 6%, reflecting both customer transitions and strategic network optimization. Retail sales were down 1.7%, but management noted that absent the cyber incident, both total and comparable sales would have been positive.
Gross margin rate held steady at 13.5% on a comparable basis, with operating expense rate rising due to cyber-related costs and fixed cost deleverage from lost sales. Adjusted EBITDA was $116 million for Q4, with the cyber incident estimated to have impacted EBITDA by $50 million. Full-year adjusted EBITDA would have reached $600 million without the incident. Free cash flow of $240 million for the year, up $330 million YoY, was driven by inventory normalization and disciplined capital spend.
- Natural Segment Outperformance: High single-digit growth in the natural segment drove overall volume gains and outperformed industry benchmarks.
- Margin Resilience: Gross margin stability and cost discipline offset cyber-related headwinds, supporting long-term margin expansion targets.
- Cash Flow Strength: Free cash flow exceeded expectations, providing flexibility for debt reduction and reinvestment in automation and digital platforms.
UNFI’s execution on cost control, network optimization, and working capital management underpinned the quarter’s results and set the stage for improved profitability in fiscal 2026.
Executive Commentary
"Our fiscal 2025 results reflect the strength and resiliency of our customer base combined with disciplined execution against the multi-year strategic plan we detailed a year ago. We're building momentum as we enter year two of our strategic plan. We're increasingly confident in our trajectory and in our ability to create sustainable long-term value for our customers, suppliers, associates, and shareholders."
Sandy Douglas, Chief Executive Officer
"We finished fiscal 2025 in line with the revised outlook ranges we provided in July during our business update call for sales, adjusted EBITDA, and adjusted EPS, while we outperformed our free cash flow target. Our expectations for the new year include incremental benefits as we accelerate the execution of our multiyear strategy, build upon the early success of our lean operating approach, and look to achieve our previously stated 2.5 turns leverage target in 2026, one year ahead our initial plans."
Matteo Tarditi, President and Chief Financial Officer
Strategic Positioning
1. Natural and Organic Category Leadership
UNFI’s natural segment, which includes natural, organic, and specialty products, is now the primary growth engine, with high single-digit growth and secular tailwinds from health and wellness trends. The company is leveraging its merchandising expertise to help both pure-play natural retailers and conventional grocers expand their offerings, creating a differentiated value proposition and deepening customer partnerships.
2. Network Optimization and Automation
Distribution network consolidation and automation investments are central to UNFI’s strategy. The company consolidated four distribution centers into larger, modern facilities, added 400,000 square feet of automated space, and expects to operate six automated DCs by 2026. These moves are designed to improve order accuracy, reduce costs, and enhance scalability—all while supporting future volume growth without outsized capital needs.
3. Lean Management and Cost Discipline
Lean daily management routines, now deployed in over half the distribution network, are delivering operating efficiency, throughput gains, and cost reductions. The focus on indirect spend, process digitization, and SG&A streamlining has already driven a 30 basis point reduction in operating expenses as a percentage of sales. These initiatives are expected to further expand margins and support free cash flow generation.
4. Digital and Value-Added Services Expansion
UNFI is expanding its suite of professional and digital services, such as credit card processing, shelf management, and the UNFI Media Network. These services deepen customer relationships and provide incremental margin opportunities, especially as digital engagement rises across the retail landscape.
5. Accelerated Deleveraging and Capital Allocation
Free cash flow outperformance has enabled UNFI to reduce net leverage by 0.7 turns YoY, with a target of 2.5 turns by fiscal 2026 and under 2.0 by 2027. The company is prioritizing debt reduction, but ongoing improvements in profitability and cash flow will create optionality for future reinvestment and strategic initiatives.
Key Considerations
UNFI’s quarter marks a turning point in operational and financial discipline, as management’s refresh strategy begins to yield measurable improvements in margin, cash flow, and market positioning. The company’s ability to sustain natural segment outperformance while optimizing its conventional portfolio is key to long-term value creation.
Key Considerations:
- Natural Growth Durability: Enduring consumer demand for health and wellness products is expected to support mid-single-digit growth in the natural segment, providing a stable foundation for future expansion.
- Margin Expansion Levers: Continued rollout of lean management, automation, and indirect spend reduction are projected to drive 60 basis points of margin expansion from 2024 to 2027.
- Free Cash Flow as a Strategic Metric: Free cash flow is now embedded in incentive compensation, aligning management and organizational focus on cash generation and capital discipline.
- Digital Services as a Margin Driver: Growth in digital and value-added services, such as the UNFI Media Network, is positioned to deliver incremental margin and stickier customer relationships.
- Conventional Portfolio Optimization: Strategic exits and customer transitions in the conventional segment are designed to improve profitability, even as overall sales growth moderates.
Risks
Key risks include potential disruption from further cyber incidents, execution risk in scaling automation and lean processes, and sensitivity to inflation and changing consumer behavior. Competitive dynamics in both natural and conventional segments, as well as customer attrition from network optimization, could pressure growth if not managed carefully. Tariff volatility and macroeconomic headwinds remain external uncertainties, though management emphasizes agility in navigating these challenges.
Forward Outlook
For fiscal 2026, UNFI guided to:
- Net sales of $31.6 billion to $32.0 billion, reflecting flat growth as optimization offsets natural segment expansion
- Adjusted EBITDA of $630 million to $700 million, with margin expansion driven by productivity and cost initiatives
- Adjusted EPS of $1.50 to $2.30 per share
- Free cash flow of approximately $300 million
- Capital expenditures of around $250 million, focused on automation, modernization, and technology enablement
Management highlighted that multi-year objectives for 2024–2027 have been raised, with low single-digit average net sales growth and low double-digit adjusted EBITDA growth now expected. Margin expansion of nearly 40 basis points in 2026 and leverage reduction to under 2.0 times by 2027 are key targets. The company expects ongoing benefits from lean initiatives, digital services growth, and targeted investments in automation.
Takeaways
UNFI’s Q4 confirms a successful pivot toward higher-margin, growth-oriented natural and digital businesses, underpinned by disciplined execution and cost control.
- Margin Expansion Trajectory: Operating leverage from automation, network optimization, and lean management is driving sustainable margin improvement, with further expansion expected as initiatives scale.
- Natural Segment as Growth Engine: High single-digit natural growth outpaces conventional and is supported by secular health and wellness trends, providing a resilient base for future performance.
- Deleveraging and Strategic Flexibility: Outperformance in free cash flow enables accelerated debt reduction, creating headroom for reinvestment and positioning UNFI to capitalize on emerging industry opportunities.
Conclusion
UNFI’s Q4 2025 results validate the strategic shift towards natural, automation, and digital services, with margin gains and free cash flow strength supporting a raised multi-year outlook. Execution on network optimization and cost initiatives is unlocking value, while disciplined capital allocation sets the stage for continued deleveraging and future growth investments.
Industry Read-Through
UNFI’s results reinforce the structural tailwind in natural and organic food distribution, with secular demand for health and wellness products outpacing conventional grocery. Automation and lean management are becoming industry imperatives as distributors seek margin expansion and operating leverage in a low-growth environment. Digital and value-added services are emerging as key differentiators for both wholesalers and retailers, with UNFI’s progress providing a blueprint for peers navigating category shifts and margin pressures. Deleveraging and capital discipline are increasingly central to investor narratives in the food distribution sector.