Dive Brief:

• United Natural Foods, Inc. (UNFI) is facing a class-action lawsuit alleging that the company misled investors about its operations and ability to achieve forecasted cost savings during the two-year period leading up to a sharp drop in its stock price earlier this month.
• The suit names as defendants UNFI CEO Sandy Douglas, CFO John Howard and former CEO Steven Spinner as well as the grocery retailer and wholesaler itself.
• The lawsuit follows UNFI’s disclosure that its net income and earnings per diluted share both fell by over 70% year-over-year during its latest fiscal quarter.

Dive Insight:

The lawsuit, filed March 20 in U.S. District Court for the Southern District of New York by attorneys representing UNFI shareholder Dan Sills, claims that UNFI should have let investors know it was not in a position to achieve tens of millions of dollars in cost savings it had projected in late 2020, when it announced a program known as “Value Path.”

Specifically, the lawsuit alleges that UNFI ran afoul of federal securities law by not disclosing that it had not not made improvements to its data-management systems that would have enabled the company to “respond adequately” to inflation and other cost changes it has encountered. That, in turn, kept UNFI from realizing that it would not be able to match gains it saw during the second quarter of fiscal 2022 during the second quarter of its current fiscal year, which would cause its profitability to be “materially adversely impacted,” according to the suit.

“These material misstatements and/or omissions created an unrealistically positive assessment of United Natural Foods and its business, operations, and prospects, thus causing the price of the Company’s securities to be artificially inflated at all relevant times, and when disclosed, negatively affected the value of the Company shares,” according to the suit.

UNFI’s share price dropped more than 28% on the day UNFI released the bombshell earnings report and has fallen further since, although it rose more than 8% on Monday to settle at $24.82. 

The suit seeks compensation “for all damages sustained as a result of Defendants’ Wrongdoing,” as well as fees for attorneys and experts, and requests a jury trial. 

As a result of UNFI’s actions, the company’s “positive statements about the Company’s business, operations, and prospects were materially misleading and/or lacked a reasonable basis,” the suit claims. The suit cites multiple UNFI earnings press releases, conference calls and regulatory filings between March 10, 2021, and this month as evidence that the company did not keep investors properly informed.

In addition, the suit claims that Douglas, Spinner and Howard should be held liable for losses UNFI shareholders experienced because they were in a position to “influence and control and did influence and control” the company’s actions.

“Individual Defendants were provided with or had unlimited access to copies of the Company’s reports, press releases, public filings, and other statements alleged by Plaintiff to be misleading prior to and/or shortly after these statements were issued and had the ability to prevent the issuance of the statements or cause the statements to be corrected,” the suit claims. 

A UNFI spokesperson declined to comment on the suit.

During a conference call with analysts on March 8, the day UNFI released its latest earnings report, Douglas said the company was surprised by its performance in its most recent quarter. “We did not have full visibility and sufficient detail into the commercial drivers of the benefits due to legacy issues with digital infrastructure and limiting real-time data, which is required to fully understand and forecast these profitability drivers,” Douglas said.

Douglas, who succeeded Spinner as UNFI’s CEO in 2021, said during the call that the company has embarked on a “transformation agenda” in an effort to improve its results. The company has also recently announced several executive changes.