Executive Summary / Key Takeaways

• HF Foods Group (NASDAQ:HFFG) is executing a comprehensive operational transformation plan, including significant investments in digital infrastructure and facilities, aimed at driving efficiency, reducing costs, and enabling future growth in the specialized Asian foodservice distribution market.
• The successful implementation of a new, unified ERP system across its network and the launch of a new e-commerce platform represent key technological advancements expected to enhance operational efficiency, data-driven decision-making, and customer service levels.
• Recent financial results show modest revenue growth and significant Adjusted EBITDA improvement, reflecting initial benefits from cost optimization efforts and strategic purchasing initiatives, despite macro headwinds and increased net loss driven by non-cash items.
• The company holds a unique position as the only scaled distributor focused on the growing Asian specialty market in the U.S., leveraging cultural expertise and a nationwide network, while facing competitive pressures from larger, broader distributors.
• Management is optimistic about 2025, viewing it as a year of strategic investment with specific targets like a 3-5% reduction in cash DS&A expenses by year-end, but investors should monitor execution risks, macro conditions, and the realization of benefits from transformation initiatives.

Setting the Scene: A Niche Leader's Strategic Evolution

HF Foods Group Inc., established in 1997, has carved out a distinct position within the vast U.S. foodservice distribution landscape. Headquartered in Las Vegas, Nevada, the company specializes in marketing and distributing a wide array of fresh produce, frozen and dry food, and non-food products, primarily catering to Asian restaurants and other foodservice customers across the nation. This focus on Asian specialty cuisine differentiates HF Foods from larger, broadline distributors, allowing it to build deep relationships with both customers and a global network of specialized suppliers.

The company's journey has included significant strategic moves, such as the merger between the original HF Foods Group and BR Global, which expanded its scale and reach. Further geographic and product expansion was achieved through acquisitions, notably the purchase of two frozen seafood suppliers in 2022, including Sealand, which bolstered its presence in key regions like the East Coast and Midwest. More recently, in 2023, the company strategically divested its poultry processing businesses to sharpen its focus on its core, higher-margin distribution operations. These historical steps have shaped HF Foods into the scaled, specialized distributor it is today, operating as a single reportable segment focused squarely on serving the unique needs of the Asian foodservice market.

The industry operates within a dynamic macro environment. While the demand for authentic Asian cuisine continues to grow, driven by favorable demographic and market trends, distributors face persistent challenges. These include the uncertainty surrounding new tariff policies, ongoing inflationary pressures impacting product costs and consumer spending, and shifts in customer behavior. Larger competitors like Sysco (SYY), US Foods (USFD), and Performance Food Group (PFGC) offer broad product lines and benefit from significant economies of scale, while specialty players like The Chefs' Warehouse (CHEF) compete on premium offerings. HF Foods positions itself as the only scaled provider specifically tailored to the Asian market, leveraging its cultural connection and specialized product sourcing and logistics to build customer loyalty and differentiate its service.

In response to this complex environment and to position itself for sustainable long-term growth, HF Foods has embarked on a comprehensive operational transformation plan. This multi-year initiative targets four critical areas: Centralized Purchasing, Fleet and Transportation, Digital Transformation, and Facility Upgrades. The overarching goal is to enhance operational efficiency, reduce costs, improve service levels, and create a stronger foundation for both organic growth and strategic acquisitions.

Technological Backbone: Powering Efficiency and Reach

A cornerstone of HF Foods' transformation is its significant investment in digital infrastructure. Recognizing the need for enhanced operational efficiency and data-driven decision-making, the company prioritized the implementation of a modern Enterprise Resource Planning (ERP) system. This initiative reached a major milestone on May 1, 2025, with the successful completion of the ERP rollout across the entire distribution network.

This unified, single ERP platform is expected to deliver breakthrough levels of efficiency, visibility, and control across all operations. It is designed to streamline processes, improve data accuracy, and provide the necessary insights to optimize everything from inventory management and purchasing to logistics and customer service. Crucially, this digital foundation is intended to unlock the full potential of the company's centralized purchasing capabilities, enabling more strategic sourcing and potentially leading to margin expansion.

In parallel with the ERP implementation, HF Foods launched a new e-commerce platform at select distribution centers (Utah, North Carolina, and Florida). This platform is specifically designed for foodservice customers and distributors, allowing restaurant employees and owners to directly purchase HF Foods' specialty products through a seamless digital experience. This initiative leverages the company's established global supplier network and robust distribution infrastructure to create a cost-efficient, value-added sales channel. Together, the ERP system and the e-commerce platform represent a strategic leap forward, acting as powerful catalysts for operational excellence and improved customer engagement. While specific quantitative metrics on the efficiency gains or cost reductions from these systems are not yet detailed, the strategic intent is clear: to modernize operations, enhance competitive capabilities, and drive future profitability.

Financial Performance: Signs of Transformation Amidst Headwinds

HF Foods' recent financial performance provides initial evidence of the impact of its strategic initiatives, even as it navigates a challenging macro environment. For the first quarter ended March 31, 2025, the company reported total net revenue of $298.4 million, a modest increase of 0.9% compared to $295.7 million in the same period of 2024. This growth was achieved despite having one fewer day of operations in Q1 2025. The revenue increase was primarily driven by volume increases and improved pricing in the Commodity, Meat and Poultry, and Seafood categories, which saw increases of 60.8%, 14.2%, and 11.9% respectively, partially offset by decreases in Asian Specialty, Produce, and Packaging and Other categories.

Gross profit for Q1 2025 increased by 1.1% to $51.0 million, up from $50.4 million in Q1 2024. The gross profit margin remained consistent year-over-year at 17.1%. Management attributed the gross profit increase primarily to improved margins in the Commodity and Seafood categories, suggesting early success from the centralized purchasing efforts.

Distribution, selling, and administrative (DS&A) expenses decreased by 1.4% to $49.8 million in Q1 2025, down from $50.5 million in the prior year quarter. This reduction was primarily due to a decrease in professional fees, reflecting the anticipated benefits following the finalization of the SEC settlement in Q2 2024. As a percentage of net revenue, DS&A expenses decreased to 16.7% from 17.1%, contributing to improved operating performance.

The company reported operating income of $1.2 million in Q1 2025, a significant improvement compared to an operating loss of $0.1 million in Q1 2024. This turnaround was driven by the combination of increased net revenue and decreased DS&A expenses. However, the net loss for Q1 2025 increased to $1.5 million, compared to a net loss of $0.6 million in Q1 2024. This expanded loss was primarily attributable to an unfavorable change of approximately $3.2 million in the fair value of interest rate swap contracts, partially offset by the improvement in operating income.

Adjusted EBITDA, a key non-GAAP measure used by management to evaluate operating performance, increased by 12.3% to $9.8 million in Q1 2025, up from $8.7 million in Q1 2024. This improvement was mainly driven by the decrease in DS&A expenses and the increase in gross profit, highlighting the positive impact of cost optimization and margin initiatives on underlying profitability.

Looking at the trailing twelve months (TTM) ended March 31, 2025, HF Foods reported approximately $1.20 billion in revenue. TTM financial ratios show a Gross Profit Margin of 17.11%, an Operating Profit Margin of -3.15%, and a Net Profit Margin of -4.11%, reflecting the impact of non-operating items and the goodwill impairment charge recorded in Q4 2024. The TTM Debt/Equity ratio stands at 0.53, indicating a moderate level of leverage. While direct TTM comparisons for all competitors are not available, larger players like Sysco and US Foods typically exhibit higher operating and net profit margins due to their scale and broader product mix, although HF Foods' gross margins in its specialized categories can be competitive.

Liquidity and Capital Allocation

As of March 31, 2025, HF Foods maintained a cash balance of approximately $16.1 million. The company's liquidity is further supported by its revolving credit facility, which was recently amended on February 12, 2025, increasing the aggregate commitment by $25 million to $125 million and adding Wells Fargo (WFC) as a lender. As of March 31, 2025, the company had approximately $60.0 million in additional funds available under this facility, subject to borrowing base calculations.

Cash flow from operations provides the primary source of funding for working capital and capital requirements. Net cash provided by operating activities decreased by $4.3 million in Q1 2025 compared to Q1 2024, primarily due to the timing of working capital outlays. This included increases in accounts receivable driven by sales growth and inventory purchases, the latter partly intended to counter potential tariff increases, which were partially offset by decreases in prepaid expenses. Net cash used in investing activities increased by $1.0 million, reflecting increased capital project spend related to the transformation initiatives. Net cash used in financing activities decreased significantly, mainly due to a shift in line of credit activity from net payments in the prior year to net proceeds in Q1 2025.

Management believes its cash flow from operations and available credit are sufficient to meet normal working capital needs for at least the next twelve months. The company was in compliance with its financial covenants as of March 31, 2025. The increase in the revolving credit facility provides enhanced financial flexibility to support the ongoing transformation plan and potential M&A activities.

Strategic Execution and Outlook

HF Foods' strategic transformation plan is in full swing, with tangible progress reported across its key pillars. Beyond the digital advancements, the company is actively enhancing its physical infrastructure. Renovations at the Charlotte, North Carolina distribution center are on track for completion by the end of Q2 2025, aiming to optimize East Coast distribution. Steady progress is also being made on a new state-of-the-art facility in Atlanta, Georgia, expected to double capacity in that market and create meaningful organic growth opportunities through cross-selling. While the Atlanta facility is expected to be fully operational by early 2026, the company plans a multi-phase approach to begin utilizing the space earlier. These facility investments are critical to optimizing the distribution network and supporting future growth.

The centralized purchasing initiative continues to expand beyond seafood and poultry into other categories like grain and cooking oil. This effort aims to leverage the company's scale to secure better pricing and quality by shifting volume to contract commitments and bypassing brokers where possible, ultimately driving gross profit dollar growth and neutralizing commodity price volatility.

M&A remains a core pillar of the growth strategy. HF Foods views itself as the strategic acquirer of choice in the Asian specialty market and is actively exploring opportunities for geographic expansion, operational synergies, and broadening its customer base and capabilities. The investments in digital infrastructure and facilities are strategically designed to support both organic growth and the integration of future acquisitions.

Management expressed confidence in the company's 2025 performance, noting positive momentum from a strong March carrying into April. They view 2025 as a "year of strategic investment" focused on building a strong foundation for the next phase of growth. A specific, quantifiable target has been set: a comprehensive plan is in place to reduce cash DS&A expenses by 3% to 5% by the end of 2025, while preserving core growth initiatives. This targeted cost reduction is a key component of the strategy to expand margins. The outlook is underpinned by the expected realization of benefits from the transformation initiatives and the continued favorable market trends in Asian cuisine, though management acknowledges the persistent macro uncertainties.

Risks and Considerations

Despite the strategic momentum, investors should be mindful of several key risks. The dynamic macro environment, characterized by potential new tariffs, persistent inflation, and shifts in consumer spending, could impact demand, product costs, and profitability. Supply chain disruptions remain a concern, requiring ongoing efforts in supplier diversification.

The company is exposed to interest rate risk on its floating-rate debt, although interest rate swaps are used to mitigate this. Fluctuations in fuel prices also pose a risk, potentially increasing operating costs, which the company seeks to manage through route optimization and fleet utilization.

Furthermore, the company has identified material weaknesses in its internal control over financial reporting, which existed as of December 31, 2024, and continued as of March 31, 2025. While remediation efforts are ongoing, there is no assurance that these efforts will be fully successful or prevent future material weaknesses. These control deficiencies could impact financial reporting reliability.

Finally, the company recorded a significant goodwill impairment charge in Q4 2024. While management determined no further impairment indicators existed in Q1 2025, future declines in financial performance or the company's stock price could necessitate further impairment charges, impacting reported earnings and book value. The company's stock is noted as thinly traded, which could contribute to volatility.

Conclusion

HF Foods Group is a specialized distributor strategically positioned within the growing Asian foodservice market in the United States. The company is actively pursuing a comprehensive operational transformation, underpinned by significant investments in digital technology, including a new ERP system and e-commerce platform, and upgrades to its distribution infrastructure. These initiatives are designed to enhance efficiency, reduce costs, and build a robust platform for future growth.

Recent financial results for Q1 2025 demonstrate initial progress, with modest revenue growth and notable Adjusted EBITDA improvement driven by cost optimization and margin initiatives, even as the company navigates macro headwinds. Management is optimistic about the trajectory for 2025, viewing it as a pivotal year for strategic investment and targeting specific cost reductions. While the company benefits from its unique niche market position and cultural expertise, it faces competitive pressures from larger industry players and must successfully execute its ambitious transformation plan to realize its full potential. Investors should closely monitor the progress of the transformation initiatives, the company's ability to mitigate macro risks, and the successful remediation of internal control weaknesses as key indicators of future performance and the strength of the investment thesis.