Executive Summary / Key Takeaways

• US Foods is demonstrating robust operational execution and margin expansion through self-help initiatives, successfully offsetting pressures from a soft macro environment and severe weather.
• The company's strategic focus on high-margin independent restaurants, healthcare, and hospitality segments, supported by differentiated technology and service models, is driving consistent market share gains.
• Strong Q1 2025 financial results, including significant Adjusted EBITDA and Adjusted EPS growth, underscore the resilience of the business model and the effectiveness of cost management and productivity improvements.
• Management reaffirmed its full-year 2025 guidance, signaling confidence in continued profitable growth and margin expansion despite updated, more conservative case volume assumptions reflecting the current market backdrop.
• Substantial cash flow generation and a strengthened balance sheet are enabling significant capital return to shareholders through share repurchases, alongside strategic investments in the business and accretive tuck-in M&A.

Setting the Table: A Resilient Model in a Fragmented Market

US Foods Holding Corp. (NYSE:USFD) operates as a national leader in the fragmented U.S. foodservice distribution industry. Its core business involves marketing, selling, and distributing a wide array of fresh, frozen, and dry food and non-food products to a diverse customer base, including independent restaurants, national chains, healthcare facilities, hotels, and educational institutions. The company's strategic framework, "WE HELP YOU MAKE IT," is designed to empower foodservice operators through quality products, advanced tools, dedicated support, and efficient deliveries.

The industry is intensely competitive, characterized by a mix of large national players like Sysco Corp. (SYY) and Performance Food Group Co. (PFGC), alongside numerous smaller regional and local distributors. While the "Big 3" (including US Foods) collectively hold roughly 35%-38% of the market share, the landscape remains highly fragmented, with smaller competitors often driving competitive intensity. Over the past decade, the larger distributors have consistently gained share, a trend US Foods is actively contributing to, particularly within its targeted, high-value customer segments.

US Foods differentiates itself through a combination of its extensive national distribution network and a growing suite of technological capabilities. The company's network of over 70 distribution facilities and a large fleet enables broad reach and efficient service. Complementing this physical infrastructure is a focus on digital innovation, exemplified by the MOXe platform for customer ordering and management, and the ongoing rollout of the Descartes routing technology. These technologies are designed to enhance efficiency, improve service levels, and provide a competitive edge in a market where operational excellence is paramount.

The company's history, including navigating periods like the Great Financial Crisis where volume saw a mid-single-digit decline but Adjusted EBITDA remained largely flat, highlights the inherent resilience of the foodservice distribution model. This stability, coupled with a strategic pivot towards accelerated self-help initiatives around late 2022, forms the foundation of the current investment narrative.

Technological Edge and Operational Excellence

Technology is increasingly central to US Foods' strategy and competitive positioning. The company is leveraging digital tools and data analytics to drive efficiency, improve customer experience, and enhance profitability. The MOXe digital platform is a key differentiator, providing customers with an intuitive interface for ordering, inventory management, and bill payment. This platform has contributed to high e-commerce penetration among independent customers, reaching a record of over 77% by the end of 2024.

Beyond customer-facing tools, significant investment is directed towards optimizing the supply chain. The Descartes routing technology, currently live in 50 markets and covering nearly 70% of routed miles, is on track for full deployment by the end of 2025. This technology is designed to drive delivery efficiency gains and provide more precise delivery windows for customers, contributing to improved on-time delivery and overall service levels, which reached their best levels since 2019 in Q1 2025. The company is also in the early stages of leveraging proprietary AI tools, such as a generative AI automatic order guide for sellers, aimed at increasing productivity and accelerating new business onboarding.

These technological advancements yield tangible, quantifiable benefits. The AI-powered delivery tracking feature within MOXe improved delivery window accuracy by 40% in pilot markets, leading to a significant reduction in customer service calls. The Descartes rollout, combined with market-led routing, delivered a 3.7% improvement in cases per mile in Q2 2024. Furthermore, process standardization initiatives like UMass are driving consistent productivity uplift across the network. For investors, these technological differentiators translate into a stronger competitive moat, potential for lower operating costs, improved margins, and enhanced customer retention and acquisition capabilities.

Performance Amidst Headwinds: A Testament to Execution

US Foods' recent financial performance underscores the effectiveness of its strategic execution, even when faced with external challenges. For the first quarter of fiscal year 2025, the company reported net sales of $9.35 billion, a 4.5% increase year-over-year. This growth was driven by a 1.1% increase in total case volume and food cost inflation and mix impact of 3.4%.

Gross profit saw a more significant increase, rising 8.0% to $1.61 billion. This expansion was attributed to higher case volume, improved cost of goods sold, pricing optimization, and a favorable year-over-year LIFO adjustment (a $5 million expense in Q1 2025 vs. $45 million in Q1 2024). As a percentage of net sales, gross profit improved to 17.3% from 16.7% in the prior year period. Operating expenses increased 4.5% to $1.39 billion, primarily due to higher volume and distribution/selling/administrative costs, though partially offset by productivity gains and cost streamlining. Operating expenses as a percentage of net sales remained flat at 14.9%.

The company demonstrated meaningful operating leverage, with adjusted gross profit dollars growing 120 basis points faster than adjusted operating expenses in Q1 2025. Adjusted gross profit per case increased by $0.30, or 4%, driven by cost of goods savings initiatives and private label penetration. While adjusted operating expense per case increased by $0.16, or 2.7% (partially impacted by weather-related inefficiencies), the faster growth in gross profit per case resulted in Adjusted EBITDA per case increasing by $0.15 to $1.90. This consistent trend of growing gross profit per case faster than operating expense per case has been observed for the past three years, highlighting sustainable operational discipline.

Adjusted EBITDA grew 9.3% to $389 million in Q1 2025, and Adjusted EBITDA margin expanded by 18 basis points to 4.2%. Adjusted Net Income increased to $159 million from $134 million in the prior year, driving a 26% increase in Adjusted Diluted EPS to $0.68. These results were achieved despite a challenging operating environment marked by severe weather and industry foot traffic declines (down 3% in Q1 2025), which management estimates created a net headwind of approximately 160 basis points to independent restaurant case growth. The ability to deliver strong profitability and earnings growth in this context underscores the strength of the self-help initiatives.

Strategic Initiatives Driving Targeted Growth

US Foods' growth strategy is sharply focused on gaining market share within the most profitable customer types: independent restaurants, healthcare, and hospitality. This targeted approach has yielded consistent results, with the company achieving its 16th consecutive quarter of share gains with independent restaurants and its 18th consecutive quarter with healthcare in Q1 2025.

Independent restaurant case volume grew 2.5% in Q1 2025 (1.3% organic), while healthcare volume increased 6.1% and hospitality volume grew 3.6%. The healthcare business, where US Foods is the industry leader, continues to perform strongly, with management confident in continued growth and share gains. Growth in healthcare and hospitality is supported by onboarding new business wins, including over $100 million in annualized sales across hospitals, senior living, lodging, and recreation facilities during Q1 2025.

The Pronto small truck delivery service is a key growth driver, particularly in dense urban areas. Building on its success, the company is expanding "Pronto penetration" to existing independent customers, offering non-routine deliveries with later cutoff times. Pilots of this service have shown a sustained 10% to 15% uplift in overall case growth from participating customers, demonstrating its potential to capture additional wallet share and compete effectively against specialty suppliers. Pronto penetration is now in 10 markets, with plans to reach 20 by year-end 2025.

Exclusive private label brands are another critical component of the growth and profit strategy. Total company private label penetration increased 90 basis points to 34% in Q1 2025, while core independent restaurant penetration reached a quarterly record of over 53%. Initiatives like the Scoop product launches, featuring innovative and labor-saving items, support this growth. Management sees no near-term ceiling to private label penetration, which provides a high-quality, competitively priced value proposition for customers while improving company margins.

Operational efficiency is being driven by initiatives beyond technology. Annualized selector turnover improved by approximately 20 percentage points and driver turnover by low single-digits over the prior year in Q1 2025, reaching the best rates in five years. This stabilization in the labor force supports distribution productivity improvements. Furthermore, administrative cost actions taken in 2025 are expected to generate $30 million in expense savings this year, building on the $120 million in annualized operating expense savings achieved in 2024.

Capital Deployment and Financial Strength

US Foods maintains a strong balance sheet and robust cash flow generation, providing significant financial flexibility. As of March 29, 2025, the company had approximately $1.8 billion in cash and available liquidity. Net cash provided by operating activities was $391 million in Q1 2025, a substantial increase from the prior year, driven by favorable changes in operating assets and liabilities.

The company ended Q1 2025 with net leverage of 2.7x, a slight reduction from year-end 2024 and well within its target range of 2x to 3x. This strong leverage profile was recently recognized by S&P with a one-notch corporate credit rating upgrade to BB+. The debt structure is favorable, with no long-term debt maturities until 2028.

Capital allocation priorities include investing in the business, executing accretive tuck-in M&A, and returning capital to shareholders. Cash capital expenditures are projected to be between $375 million and $425 million in fiscal year 2025, focused on organic growth initiatives, capacity expansion (including a new semi-automated facility), fleet, and technology. The company completed the acquisition of Jakes Finer Foods for $92 million in Q1 2025, expanding its presence in South Texas, while also divesting the non-core Freshway business for $38 million.

Returning capital to shareholders remains a key focus. The company repurchased $23 million of common stock in Q1 2025. Subsequent to the quarter, the Board authorized a new $1 billion share repurchase program, building on the cumulative buyback of over 24 million shares totaling $1.3 billion since late 2022. Management expects to return to more meaningful share repurchases over the remainder of 2025 and anticipates deploying approximately half of the projected $4 billion-plus cash flow generated over the 2025-2027 long-range plan period towards buybacks.

Outlook and Risks

Despite the persistent soft macro environment and the impact of severe weather in Q1 2025, US Foods reaffirmed its full-year fiscal 2025 guidance. The company expects Net Sales growth of 4% to 6%, Adjusted EBITDA growth of 8% to 12%, and Adjusted Diluted EPS growth of 17% to 23%.

While the overall sales and earnings guidance was maintained, the company updated its modeling assumptions to reflect the current market reality. Total case growth is now expected to be between 1% and 3% (down from 2%-4%), with independent restaurant case growth projected at 2% to 5% (down from 4%-7%). Sales inflation and mix are now expected to be approximately 3% (up from 2%). Management expects independent case growth to accelerate throughout Q2 2025, reaching the updated full-year target range, citing momentum in net new account generation.

Management's confidence in achieving the guidance, even with lower case volume assumptions, stems from the strength of its self-help initiatives and operational execution. They believe they have sufficient levers to pull on the gross profit and operating expense fronts to deliver the targeted profitability and earnings growth. The company remains confident in its new 2025-2027 long-range algorithm, which targets a 5% sales CAGR, 10% Adjusted EBITDA CAGR, at least 20 basis points of annual Adjusted EBITDA margin expansion, and a 20% Adjusted EPS CAGR.

Key risks to this outlook include continued weakness in consumer confidence and discretionary spending, which could further pressure restaurant foot traffic. Fluctuations in fuel costs and food inflation, while partially offset by surcharges and strategic procurement, could impact margins and customer affordability. Competition remains intense, and the ability to continue gaining market share is crucial. Labor costs and availability, although improving, remain a factor. The effective integration of acquired businesses and the successful rollout of new technologies are also important for realizing expected benefits.

Conclusion

US Foods is executing a focused strategy centered on profitable growth in key customer segments, operational efficiency, and technological innovation. The company's performance in the first quarter of 2025, delivering strong Adjusted EBITDA and Adjusted EPS growth despite significant macro and weather-related headwinds, highlights the resilience of its business model and the effectiveness of its self-help initiatives.

The strategic emphasis on independent restaurants, healthcare, and hospitality, supported by differentiated service models and technology like MOXe and Descartes, is driving consistent market share gains. While the near-term market environment remains challenging, management's decision to reaffirm full-year guidance, underpinned by confidence in its operational playbook and cost management levers, signals a belief in its ability to control its destiny.

With a strong balance sheet, improving credit profile, and robust cash flow generation, US Foods is well-positioned to continue investing in its business for future organic growth and return substantial capital to shareholders through share repurchases. The company's long-term algorithm appears achievable based on the momentum in its strategic initiatives. For investors, US Foods presents a compelling self-help story, where operational execution and targeted growth are expected to drive significant earnings and cash flow expansion, offering value even in a volatile market landscape.