HF Foods Group Inc. (NASDAQ:HFFG): A Leading Asian Specialty Food Distributor Executing a Comprehensive Transformation Plan

HF Foods Group Inc. (NASDAQ:HFFG) is a leading Asian foodservice distributor that markets and distributes fresh produce, seafood, frozen and dry food, and non-food products to primarily Asian restaurants and other foodservice customers throughout the United States. The company has established itself as an indispensable partner in delivering premium specialty products that are essential for authentic dining experiences that customers expect.

Business Overview

HF Foods was formed through a merger between two complementary market leaders, HF Foods Group Inc. and B&R Global, in 2022. The company aims to supply the increasing demand for Asian American restaurant cuisine, leveraging its nationwide network of distribution centers and strong relations with growers and suppliers of fresh, high-quality specialty restaurant food products and supplies in the US, South America, and China. Capitalizing on its deep understanding of the Chinese culture, HF Foods has become a trusted partner serving Asian restaurants and other foodservice customers throughout the United States, providing sales and service support to customers who mainly converse in Mandarin or other Chinese dialects.

Financial Performance

For the full year 2023, HF Foods reported annual net revenue of $1,148,493,000, a slight decrease from the previous year. However, the company's annual net income was -$2,174,000, and its annual operating cash flow and free cash flow were $15,804,000 and $12,290,000, respectively.

In the first quarter of 2024, HF Foods achieved its highest ever recorded net revenue of $295,654,000, representing a 0.6% increase compared to the same period in 2023. This growth was primarily driven by product cost inflation and improved pricing in certain categories, partially offset by the $2.7 million loss in revenue resulting from the exit of the company's chicken processing businesses. Gross profit increased by 0.5% to $50,411,000 for the quarter, with gross profit margins remaining flat at 17.1%. The increase in gross profit was driven by improvement in the seafood category due to the successful execution of a centralized purchasing plan.

Distribution, selling, and administrative expenses decreased by 4.6% to $50,496,000 for the first quarter of 2024, primarily due to lower professional fees, partially offset by higher payroll and related labor costs. As a percentage of net revenue, these expenses decreased to 17.1% from 18.0% in the prior year period, primarily due to lower professional fees and increased net revenue, partially offset by increased headcount.

Net loss for the first quarter of 2024 improved to $559,000, compared to a net loss of $5,797,000 in the prior year quarter. The improvement was driven by lower distribution, selling, and administrative costs, as well as higher gross profit, partially offset by a $4.7 million change in the fair value of interest rate swaps. Adjusted EBITDA increased by 51.4% to $8,702,000 for the first quarter, primarily due to the lower distribution, selling, and administrative expenses.

Transformation Plan and Growth Initiatives

To position the business for long-term success, HF Foods has initiated a comprehensive, operational transformation plan focused on four key areas: centralized purchasing, fleet and transportation, digital transformation, and facility upgrades. The company's centralized purchasing initiative has yielded significant positive results with respect to margin expansion in the seafood product category, and it is now expanding the program to other categories.

HF Foods has also established a national fleet maintenance program, which includes defining new truck specifications, initiating a replacement program for 50% of its current fleet, implementing a national fuel savings program, and outsourcing domestic inbound freight logistics to a third-party partner. These efforts are expected to deliver substantial improvements to the company's transportation system.

The digital transformation initiative involves the implementation of a modern ERP solution across all of HF Foods' distribution centers, which is expected to enhance operational efficiency and responsiveness, streamline processes, and enable greater data-driven decision-making. The company is also reorganizing and upgrading its facilities and distribution centers to efficiently streamline costs and capitalize on cross-selling opportunities with both new and existing customers.

Liquidity and Capital Resources

As of March 31, 2024, HF Foods had cash of approximately $18.2 million and access to approximately $40.9 million in additional funds through its $100.0 million line of credit, subject to a borrowing base calculation. The company has funded its working capital and other capital requirements primarily through cash flow from operations and bank loans. Management believes HF Foods has sufficient funds to meet its working capital requirements and debt obligations in the next twelve months.

Risks and Challenges

HF Foods operates in a highly competitive foodservice distribution industry, which is characterized by low margins and periods of significant or prolonged inflation or deflation. The company also faces risks related to qualified labor shortages, unfavorable macroeconomic conditions, competition from new entrants in the Chinese/Asian restaurant supply market niche, increases in fuel costs, disruptions in relationships with vendors and customers, and the effects of the COVID-19 pandemic or other pandemics. Additionally, the company's related party transactions and potential conflicts of interest, as well as its ability to comply with various federal, state, and local rules and regulations, pose potential risks.

Outlook and Conclusion

HF Foods is executing a comprehensive transformation plan to drive growth and cost savings, and the company is making solid progress on its key initiatives. The centralized purchasing program, fleet and transportation improvements, digital transformation, and facility upgrades are all expected to have a positive impact on the company's financial performance in the coming years.

While the company faces various risks and challenges, HF Foods' position as a leading Asian specialty food distributor, its deep understanding of the Chinese culture, and its commitment to serving the vast array of Asian restaurants in the United States position it well for long-term success. The company's focus on operational efficiency and growth initiatives, combined with its strong liquidity position, suggest that HF Foods is well-equipped to navigate the current market environment and capitalize on the increasing demand for Asian American cuisine.