HF Foods Group Inc. is a leading marketer and distributor of fresh produce, 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 a trusted partner in servicing the vast array of Asian restaurants in need of high-quality and specialized food ingredients at competitive prices.
Detailed Business Overview and History
HF Foods was formed through a merger between two complementary market leaders, HF Foods Group Inc. and BR Global, in 2022. This strategic combination allowed the company to expand its distribution network and strengthen its position as a leading supplier of Asian specialty food products across the country. Prior to the merger, HF Foods Group Inc. had established itself as a leading Asian foodservice distributor, marketing and distributing fresh produce, seafood, frozen and dry food, and non-food products primarily to Asian restaurants and other foodservice customers throughout the United States.
Capitalizing on its deep understanding of the Chinese culture, HF Foods became a trusted partner serving Asian restaurants and other foodservice customers across the country, providing sales and service support to customers who mainly converse in Mandarin or other Chinese dialects. The company aimed to supply the increasing demand for Asian American restaurant cuisine, leveraging its nationwide network of distribution centers and strong relations with growers and suppliers.
In 2022, HF Foods expanded its distribution network by acquiring two frozen seafood suppliers in Illinois, Texas, and along the eastern seaboard, from Massachusetts to Florida, as well as Pennsylvania, West Virginia, Ohio, Kentucky, and Tennessee. This strategic acquisition allowed HF Foods to further capitalize on the growing popularity of Asian cuisine and strengthen its position as a leading food distributor in the industry.
Despite its growth and success, HF Foods has faced its share of challenges over the years. In 2020, the company was impacted by the COVID-19 pandemic, which disrupted global supply chains and changed consumer eating habits. However, HF Foods was able to navigate these challenges by implementing operational improvements and adapting its business model to meet the evolving needs of its customers. The company also weathered a formal, non-public SEC investigation in 2024 related to alleged false and misleading statements, ultimately reaching a settlement agreement with the SEC.
On June 6, 2024, the SEC announced that it had accepted an Offer of Settlement submitted by the company to resolve the previously disclosed formal, non-public SEC investigation. The company agreed to pay a $3.9 million civil monetary penalty to settle allegations that the company and certain of its current and former directors and officers violated securities laws.
In a significant leadership change, on October 24, 2024, the Board of Directors terminated Xiao Mou Peter Zhang as Chief Executive Officer of the company, without cause. Xi Felix Lin was appointed to serve as Interim Chief Executive Officer, effective immediately. Mr. Lin continues to serve as the company's Chief Operating Officer and President, bringing continuity to the leadership team during this transition period.
Today, HF Foods operates a network of 22 distribution centers strategically located to serve customers from coast to coast. The company boasts a diverse product portfolio, offering a wide range of fresh, frozen, and dry goods catered to the unique needs of its Asian restaurant clientele. This includes specialty produce, seafood, meat, poultry, and an extensive selection of Asian-inspired sauces, seasonings, and packaging materials.
Financial Performance and Liquidity
Financial Performance
HF Foods has demonstrated resilience in the face of industry challenges, reporting relatively stable financial results in recent years. In fiscal 2023, the company generated $1.15 billion in total revenue, a 4.6% increase from the prior year. Net income for the year came in at -$2.17 million, impacted by various one-time charges and the lingering effects of the COVID-19 pandemic on the foodservice industry.
For the nine months ended September 30, 2024, HF Foods reported total net revenue of $895.6 million. The company's revenue is disaggregated into several principal product categories:
1. Seafood: Accounted for 32.7% of total net revenue, up from 31.3% in the same period of the prior year. This increase was primarily attributable to product cost inflation and improved pricing in the seafood category.
2. Asian Specialty: Made up 25.9% of total net revenue, slightly down from 26.4% in the comparable prior year period.
3. Meat and Poultry: Contributed 20.8% of net revenue, up from 18.8% in the same period of 2023. The increase was driven by higher pricing due to product cost inflation.
4. Produce: Accounted for 10.7% of total net revenue, marginally down from 10.8% in the prior year period.
5. Packaging and Other: Comprised 5.3% of net revenue, down from 6.3% in the same period of 2023.
6. Commodity: Made up 4.7% of net revenue, down from 6.5% in the prior year period, primarily due to commodity price deflation.
Gross profit for the nine months ended September 30, 2024, was $153.0 million, up 0.8% from $151.8 million in the same period of the prior year. However, the gross profit margin decreased slightly to 17.1% from 17.5%, reflecting increased costs that were not fully passed through to customers.
Distribution, selling and administrative expenses decreased to $150.0 million in the first nine months of 2024, down from $154.0 million in the comparable 2023 period. This 2.6% decline was primarily driven by a $10.0 million decrease in professional fees, partially offset by increases in payroll, labor costs, and insurance expenses.
In the most recent quarter (Q3 2024), HF Foods reported revenue of $298.39 million, representing a year-over-year growth of 6.0%. The increase in revenue was primarily attributable to product cost inflation and volume increases which improved pricing in certain categories, such as chicken and seafood. This was partially offset by deflation in commodities, such as cooking oils, and a $2.7 million loss in revenue resulting from the exit of the chicken processing businesses in 2023. However, the company reported a net loss of $43.89 million for the quarter.
Liquidity
The company's balance sheet remains relatively healthy, with $11.45 million in cash and cash equivalents as of September 30, 2024. HF Foods' current ratio stands at 1.23, indicating a reasonable ability to meet its short-term obligations. The quick ratio is 0.55, suggesting that the company may face some challenges in meeting its most immediate liabilities without selling inventory.
HF Foods' total debt-to-equity ratio of 0.42 suggests a moderately leveraged capital structure, providing some financial flexibility to fund future growth initiatives. The company has a $100 million revolving credit facility, with $27.3 million available as of September 30, 2024, subject to a borrowing base calculation. This available credit line provides additional liquidity if needed.
For the fiscal year 2023, HF Foods generated $15.80 million in operating cash flow and $12.29 million in free cash flow, demonstrating the company's ability to generate cash from its operations.
Operational Transformation and Strategic 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 optimization, digital transformation, and facility upgrades.
The centralized purchasing program, which began with seafood products, has already yielded positive results, driving margin expansion in that category. The company is now expanding the initiative to other product categories, such as cooking oils, to further enhance supply chain efficiency and profitability.
In the area of fleet and transportation, HF Foods has established a national fleet maintenance program, implemented a fuel savings initiative, and plans to outsource domestic inbound freight logistics to a third-party partner. These measures are expected to deliver substantial improvements to the company's transportation system and cost structure.
HF Foods is also investing in a modern ERP solution to be deployed across its distribution network. This digital transformation initiative is aimed at enhancing operational efficiency, streamlining processes, and enabling data-driven decision-making to better serve the company's customers.
Additionally, the company is reorganizing and upgrading its facilities and distribution centers to optimize costs and capitalize on cross-selling opportunities with both new and existing customers.
Competitive Landscape and Industry Dynamics
The foodservice distribution industry in which HF Foods operates is characterized by low margins and periods of significant inflation or deflation. The company faces competition from both national and regional players, including large-scale distributors as well as smaller, specialized providers.
The entry of new competitors into the Chinese/Asian restaurant supply market niche, where HF Foods has carved out a strong presence, poses an ongoing challenge. Competitors may seek to replicate the company's expertise in servicing the unique needs of Asian-American restaurants or leverage their own scale and resources to gain market share.
Fuel cost fluctuations and disruptions to global supply chains also present risks that can impact HF Foods' operating margins and profitability. The company's ability to effectively manage these industry dynamics will be crucial to its long-term success.
Outlook and Conclusion
As HF Foods navigates the evolving foodservice landscape, the company is well-positioned to capitalize on the growing appetite for Asian-American cuisine across the United States. The company's comprehensive transformation initiatives, coupled with its deep industry knowledge and extensive supplier relationships, position it as a strategic partner of choice for Asian restaurants seeking high-quality, specialized food products.
Looking ahead, HF Foods' success will depend on its ability to execute its operational improvements, diversify its customer base, and adapt to changing consumer preferences and industry trends. The recent leadership change, with the appointment of Xi Felix Lin as Interim CEO, may bring new perspectives and strategies to address the challenges and opportunities in the market.
While the company has faced some financial headwinds, as evidenced by the recent quarterly loss, the overall revenue growth and operational efficiency improvements suggest potential for recovery. The settlement with the SEC removes a significant regulatory overhang, allowing management to focus more fully on business operations and growth strategies.
With a strengthened financial profile, a clear strategic vision, and a focus on its core competencies in Asian food distribution, HF Foods appears poised to navigate the current challenges and work towards solidifying its leadership position in the Asian food distribution market. The company's ability to leverage its extensive distribution network, adapt to changing market conditions, and capitalize on the enduring popularity of Asian cuisine in the United States will be key factors in delivering long-term value for its shareholders.