HF Foods Group Inc. (HFFG) is a leading food distributor primarily serving Asian restaurants across the United States. The company has undergone a comprehensive transformation plan aimed at driving sustainable long-term growth and delivering value to its shareholders.
Business Overview and History
HF Foods was formed in 2017 through the merger of two complementary market leaders, HF Foods Group Inc. and BR Global. This strategic combination expanded the company's distribution network and solidified its position as a premier supplier of Asian specialty food products, seafood, fresh produce, frozen and dry food, and non-food items to the growing Asian-American restaurant industry.
In 2020, HF Foods faced significant challenges as a result of the COVID-19 pandemic, which disrupted global supply chains and led to changes in consumer eating and dining out habits. The company implemented measures to support its employees and customers during this difficult time.
In 2022, HF Foods further bolstered its geographic footprint by acquiring two frozen seafood suppliers, extending its reach from Illinois and Texas to the eastern seaboard, spanning from Massachusetts to Florida, as well as Pennsylvania, West Virginia, Ohio, Kentucky, and Tennessee. This expansion has allowed HF Foods to capitalize on the increasing demand for Asian-American cuisine nationwide, leveraging its deep understanding of Chinese culture and strong relationships with growers and suppliers.
In 2023, HF Foods faced another setback when it decided to exit its chicken processing businesses, resulting in a $3.1 million loss in revenue during the second quarter of 2024. However, the company was able to offset this loss through product cost inflation, volume increases, and improved pricing in certain categories, such as seafood.
Throughout its history, HF Foods has remained dedicated to serving the vast array of Asian restaurants in need of high-quality and specialized food ingredients at competitive prices, becoming a trusted partner to its customers across the United States.
Financial Performance and Ratios
HF Foods' financial performance has shown signs of improvement in recent quarters, despite the challenges posed by the COVID-19 pandemic and other macroeconomic headwinds. For the fiscal year ended December 31, 2023, the company reported total revenue of $1.15 billion, a slight decrease from the previous year's $1.17 billion. Net income for the same period was a loss of $2.17 million, compared to a profit of $460,000 in 2022.
For the first half of fiscal year 2024, HF Foods reported total net revenue of $598.00 million, up 2.0% compared to the same period in the prior year. Gross profit for this period was $102.88 million, also up 2.0% year-over-year, with the gross profit margin remaining flat at 17.2%. The company's net loss attributable to HF Foods Group Inc. improved to $0.68 million for the first half of 2024, compared to a net loss of $6.78 million in the same period last year.
In the most recent quarter (Q2 2024), revenue increased by 3.4% year-over-year to $302.34 million, primarily driven by product cost inflation and improved pricing in certain categories, partially offset by the loss of revenue from the exit of the chicken processing businesses in 2023. Net income for the quarter was $0.24 million, compared to a net loss of $1.56 million in Q2 2023. Gross profit increased 3.6% to $52.5 million, with the gross margin expanding slightly to 17.4%.
Liquidity
The company's liquidity position remains stable, with a current ratio of 1.18 and a quick ratio of 0.42 as of June 30, 2024. HF Foods' debt-to-equity ratio stands at 0.67, indicating a moderate level of leverage. The company's return on assets (ROA) and return on equity (ROE) for the trailing 12 months were 0.64% and 1.37%, respectively, reflecting the need for operational improvements to enhance profitability.
As of June 30, 2024, HF Foods had $14.00 million in cash and $29.90 million available out of a $100 million revolving credit facility. The company's operating cash flow (OCF) for the fiscal year 2023 was $15.80 million, with free cash flow (FCF) of $12.29 million. However, in Q2 2024, OCF was -$7.07 million and FCF was -$10.82 million, indicating some short-term cash flow challenges.
Product Segments
HF Foods operates in several key product segments:
1. Seafood: This segment includes frozen, fresh, and live seafood products, accounting for 32.0% of total net revenue in the first half of fiscal year 2024.
2. Asian Specialty: Focusing on Asian-focused specialty food products, this segment contributed 26.0% of total net revenue in the same period.
3. Meat and Poultry: This segment made up 20.0% of total net revenue in the first half of fiscal year 2024.
4. Produce: Fresh produce items contributed 11.0% to total net revenue in the first half of 2024.
5. Packaging and Other: This segment, which includes food packaging supplies and other non-food items, accounted for 6.0% of total net revenue.
6. Commodity: Encompassing the distribution of commodity food items, this segment made up 5.0% of total net revenue in the first half of 2024.
Operational Transformation and Strategic Initiatives
To position the business for long-term success, HF Foods has implemented a comprehensive operational transformation plan focused on four key areas: centralized purchasing, fleet and transportation, digital transformation, and facility upgrades.
The centralized purchasing program, which the company piloted with seafood products in 2023, has yielded positive results, leading to significant margin expansion in that category. HF Foods is now expanding the program to include other product categories, such as chicken and cooking oils, to further optimize its procurement and pricing strategies.
In the area of fleet and transportation, HF Foods has established a national fleet maintenance program, implemented fuel-saving initiatives, and plans to outsource its domestic inbound freight logistics to a third-party partner. These efforts are expected to drive substantial improvements in the company's transportation system and distribution costs.
HF Foods' digital transformation initiative involves the implementation of a modern ERP solution across all of its distribution centers. This project, which marked a significant milestone with the successful rollout at one of the company's California facilities, is anticipated to enhance operational efficiency, data accuracy, and overall customer satisfaction.
The company is also actively upgrading its facilities and distribution centers to streamline costs and capitalize on cross-selling opportunities. This includes the renovation of the Charlotte, North Carolina facility and the planned expansion in the Atlanta market, which will effectively double the company's capacity in that region.
Risks and Challenges
While HF Foods has made progress in its transformation efforts, the company continues to face several risks and challenges. The highly competitive nature of the foodservice distribution industry, particularly the entry of new competitors into the Chinese-Asian restaurant supply market niche, poses a threat to the company's market share and profitability.
Additionally, the company's operations are susceptible to fluctuations in fuel costs, disruptions in relationships with vendors and customers, and the ongoing effects of the COVID-19 pandemic on consumer dining habits and global supply chains. HF Foods must also navigate potential challenges related to labor shortages, regulatory changes, and the integration of acquired businesses.
In June 2024, the SEC announced that it had accepted an Offer of Settlement from HF Foods to resolve a formal investigation into allegations of false and misleading statements by the company's former Chairman/CEO and former CFO. HF Foods agreed to pay a $3.9 million civil penalty, which may impact the company's financial position and reputation.
Outlook and Conclusion
Despite the headwinds, HF Foods' comprehensive operational transformation plan, robust infrastructure, industry expertise, and growing customer base position the company well to capitalize on the favorable market trends and demographics driving the increasing demand for Asian-American cuisine.
As HF Foods continues to execute its strategic initiatives, the company is focused on improving its financial performance, enhancing operational efficiency, and strengthening its competitive position within the rapidly evolving foodservice distribution landscape. The company expects its ongoing initiatives to yield significant dividends and drive growth beyond 2024.
HF Foods is also exploring M&A opportunities for geographic expansion, particularly targeting acquisitions that will allow it to realize meaningful synergies. While the company has not provided specific quantitative guidance, management remains confident in their ability to transform the business and deliver sustainable long-term growth.
Investors should closely monitor the company's progress in implementing its transformation plan, its ability to navigate the industry's challenges, and its success in improving profitability and cash flow generation while delivering long-term value in the competitive foodservice distribution market.