US Foods Holding Corp.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

US Foods is a major food distributor, primarily serving restaurants, healthcare facilities, and other foodservice establishments across the United States.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

US Foods, is a key player in a large and competitive industry, with a focus on food distribution. It operates in the U.S. and is primarily involved in distributing a diverse range of food products to independent restaurants, healthcare and hospitality clients, and a variety of other institutions.

  • Revenue Distribution: The company’s revenue comes from distributing products across many sectors, which include independent restaurants, healthcare and hospitality facilities, and various other institutions. The company has a strong focus on quality, value, and service. However, due to reliance on single-contracts, their revenue can be affected by client-driven changes in volume, or by industry-wide trends.
  • Industry Trends: The U.S. foodservice distribution industry is highly fragmented and competitive. Major trends impacting the industry include increasing competition (including e-commerce), consolidation, supply chain vulnerabilities, inflation, fluctuating customer preferences and the rise of private-label brands. The industry also seems to be very sensitive to demand patterns and fluctuations in prices of products.
  • Margins: Gross profit margins in the business are generally stable, but not very high. These margins are impacted by volume, competition, inflation, logistics, and overall supply chain conditions.

The company mainly focuses on its customers’ needs through its value-added services, which include: * Product Quality & Assortment * Distribution & Logistics * Technology solutions * Consulting and expertise

Competitive Landscape: The foodservice distribution sector is extremely competitive. Competition comes not only from other national distributors, but also from regional and local players. These players can vary widely in size and scale. In such a fragmented and competitive environment, creating real differentiation and sustainable advantage is challenging for any player. Major competitors include Sysco, Performance Food Group, and a variety of other national and regional distributors. The competitive intensity causes price fluctuations, and can reduce overall profits of all the players.

What Makes US Foods Different?: US Foods has adopted its “GREAT FOOD, MADE EASY” slogan. Management has emphasized on a few areas: “sourcing capabilities, operational excellence, and strong local relationships with customers.” The company’s strategy is to be a reliable partner through consistent quality, value, and service. The company also has a commitment to ESG initiatives such as product sustainability and ethical sourcing. The company uses its proprietary technology to serve customers better, and to optimize supply chain operations. US Foods aims to be more than just a supplier, and to be a partner of choice.

  • Financials In-depth:
    • The company has experienced steady revenue growth, but margins were volatile due to inflation, higher costs, and lower demand from large chains and customers. As of September 30, 2023, the Company’s balance sheet reflected total assets of $11,370 million, total liabilities of $8,651 million, and a total equity of $2,718 million. The Company’s recent performance is reflected in the financial data as a decline in net income compared to the previous year, which is primarily due to increased expenses.
    • Revenues: US Foods has seen a moderate increase in revenues during 2023 over 2022, driven by higher volumes and rising prices. Organic growth has contributed roughly half of this increase, with most of the rest attributable to acquisitions. Revenue is primarily sourced from sales of food, supplies, and related items to its customers. * Total sales: As of September 2023 (YTD) Total sales were $26,426 million, compared with $25,164 million in the same period of 2022.
    • Cost of Sales: As you might expect, cost of sales comprise the largest chunk of expenses. As of September 2023, it was $23,468 million. Costs are related to acquisition, transportation, and storage of food products and related items.
    • Operating Expenses: Operating expenses mainly consist of distribution, selling, and administrative costs. As of September 2023, operating expenses were $2,709 million.
    • Net Income: The Net income saw a dip in the latest reports. As of September 2023 the net income was 373 million, compared to 629 million for the same period of the previous year.
    • The tax rate was 28.1%, which increased a bit due to non-deductible expenses.
    • Cash Flow: For the first 39 weeks of 2023, the Company reported a cash flow from operations of $106 million, however, the negative investing cash flow (-$700.6 million), and the positive financing cash flow ($1,389 million), and with negative adjustments of the cash balance of -$456 million, leads to total reduction of cash balance of approximately -$66 million. Most of the positive financing cash flow comes from debt issuance.
    • Capital Structure:
      • The company’s short-term debt (due in 1 year or less) is $2,450 million, while long term debt is $5,551 million. Debt-to-equity ratio of $11,319 million vs equity of 2,718 million comes to 4.16, which means high leverage.
      • It is worth noting that, as of end of June 2023, the Company’s debt to tangible equity ratio is approximately 4.9, up significantly compared to December 2022 (3.6), This increase is directly attributable to the company’s high level of indebtedness compared to the assets.

Recent Concerns/Controversies/Problems:

  • US Foods continues to face challenges related to supply chain disruptions, inflation, and a tight labor market, which affect both its revenues and margins. Management acknowledges that while inflation has abated somewhat, they are still facing a changing business landscape that affects growth and margins.
  • They have acquired several businesses, but they may struggle to integrate their operation into their own.
  • They had an increase in debt over the last few quarters, which is a concern in times when interest rates are high, and a slowing economy is expected.

  • The competitive nature of the industry is increasing the challenge for them to retain current clients and attract new clients.

  • Management Thoughts on Recent Difficulties: Management is focused on cost reductions, improvements to supply chain, and driving operational efficiencies to counteract recent issues. They have also stressed their focus on the long-term strategy of acquiring market share. Also, management noted that the supply-chain improvements and cost-savings are expected to start showing from Q4 2023 and 2024.

  • Moat Rating: 2 / 5
    • While US Foods possesses a large distribution network that creates some barriers to entry, it is not truly a “wide moat” company. There are no true cost advantages, or high switching costs. They have some elements of a moat from scale in their distribution network, long-standing client relationships, and brand recognition. However, the competitiveness of the industry, and high dependence on external economic factors and commodity costs, limit the durability and sustainability of any edge. A rating of 2 reflects a company that has a “narrow” moat. They may generate slightly higher profits over an average company for some time period, but they are unlikely to do that over a long period of time.
  • Understandability Rating: 3 / 5
    • The business model is relatively straightforward, focusing on the distribution of food and related items. However, some aspects, especially relating to financial accounting and the complexities of the supply chain require thorough study. Also, the management makes frequent references to the food distribution industry. All of these factors make this a 3 on our scale.
  • Balance Sheet Health Rating: 3 / 5
    • US Foods has a high debt burden relative to its equity, and a recent dip in net income. Although management has tried to make good use of the debt, there is an element of risk when looking at their cash position as it relates to its long-term debts. Their coverage ratio is ok but not great. For these reasons we would grade their balance sheet health as a 3 on our scale.