Sandy Douglas: Yeah, Kelly. This is Sandy. What I would say is A, we haven’t given out year guidance or really any specific strategic planning information largely because we’re in the first year of really starting to roll out our transformation. But if you look at the $400 million in our capital budget, the majority of it is focused on transformation. A minority being kind of the maintenance capital that keeps our system going. So we pivoted to investing in changing the profile of the company and accelerating profitable growth. Our plans going forward will be — with our newly constituted Board and the financial review will be to rigorously go through all expenditures and make sure that every investment we make in this coming year and forward delivers not only maximum transformation benefits but also outsized shareholder returns.
And so, we wouldn’t be in a — able to give out year guidance on this. But the process by which we will set that will be rigorous and will be designed to drive the transformation and deliver shareholder returns.
Kelly Bania: Thank you.
Operator: Your next question comes from the line of Peter Saleh from BTIG. Your line is open.
Peter Saleh: Great. Thanks for taking the question. I just wanted to come back to the conversation around shrink. Can you give us a sense of what you have modeled into your 2024 guidance at this point for shrink? And are you seeing any changes there or is it kind of pretty consistent levels of shrink across product types and customers? Just trying to understand the dynamics going on at that level right now.
Sandy Douglas: Sure. Thanks, Peter. Shrink is an important opportunity for us. As we mentioned last year, the shrink levels in our business have increased significantly over the past few years. They are driven by four main categories, procurement, inventory gains or losses, damages, and spoilage. And all four of those have different root causes. And we’ve stood up a team to look at each of them and to manage them rigorously. We’ve identified root causes. We’re rolling out new processes and training across our system. And the entire management system is producing some early results. We haven’t disclosed the specific component of shrink improvement that’s in our guidance, but we see the opportunity has being significant and multi-year starting with this fiscal year.
Peter Saleh: Understood. And then just lastly, Sandy, last we spoke on the shrink, the net inventory piece I think was kind of the piece we discussed in more detail. Shouldn’t that piece really start to improve as your employees become more experienced and more tenured? Are you already seeing that or is that yet to come?
Sandy Douglas: Yeah. That’s a knowledgeable question. The answer to that is yes, that helps. Overall operations improves as turnover those down and that’s a core part of our people strategy in our system. And that’s not just shrink. It’s in all aspects of customer service and efficiency. But in addition to folks being more experienced, there are also process and system improvements they’re willing out to try to take the variability out. And we’ve identified where the root causes are. And we’re in the process of rolling out the improvements. And I expect this number to get better as we go forward.
Peter Saleh: Thank you very much.
Operator: Your next question comes from the line of Andrew Wolf from CL King. Your line is open.
Andrew Wolf: Thank you. Good morning. Sandy, I wanted to also ask the CapEx from executive and maybe Board view. Like, could you just give investors and us just some sense of how you guys are formulating and planning return on investment or ultimate earnings power? I know some of it is, you said is contingent on how the implementation goes and the returns that come from that, but CapEx has gone up quite a lot. So could you just give us a sense of how you’re thinking about that? And I guess one of the ways I’d like you to frame it, you can frame it other ways, is how much of this is margin — recapturing the margin that has been diminished recently? And how much of this is, I think you’ve alluded to a robust pipeline. How much of this is really more top-line driven?
Sandy Douglas: Sure. So let me start by saying that every dollar of capital that we allocate is scrutinized through several different angles. Maintenance capital is by definition, maintenance capital. But what we have done is, we’ve taken the transformation agenda and the capital that’s embedded and I think I mentioned in the previous question that it’s about two-thirds of the total capital, that’s not all incremental. We’ve actually sweated through the maintenance capital and kind of zero-based it to try to source some of it. So the increase is not equal to the total of the transformation. And I would say the biggest load of the capital right now is operational. It’s automation and network-related which is focused on — I mean there are top-line benefits because customer service and customer experience gets better.
But the big payoff is actually in efficiencies in the supply chain and then the ability to get more efficient growth out of the buildings that exist. An automated building can actually produce a whole lot more sales than one that’s not. And that gives you return on capital. That gives you working capital benefits, et cetera. So, our transformation agenda, certainly, it’s focused on creating a great customer experience and enabling UNFI to serve the maximum number of customers in categories profitably. But in doing that, we want to have a system that works very efficiently. And then do then sort of the non-capital side of our transformation which is more about how we work with suppliers and how we make the commercial system work is how do we fully activate that using data to create growth and to earn profitability as we generate growth for some of the bigger profit pools in the system which come out of our suppliers.
So it’s a very general answer. But if you want to follow up, Andy, I’m happy to answer.
Andrew Wolf: And that’s okay. I just had one clarification follow-up is — you mentioned, I think that — I think, first, you said it’s mainly operational network, which means margins. But then you said an automated system also has better throughput. So I just want to, again, back to the — how you’re justifying how the Board is voting on this and justifying the investment. Is it justified at all through margin? And then if the better capacity that you get through automation allows more customers? Is that sort of even a better return than you’ve — has already been agreed upon or is it both?
Sandy Douglas: Yeah. I mean, it’s sort of which side of it, do you look at it. There’s definitely operating margin improvement, check. But there’s returns on capital improvement to the extent that you can move more sales through a building and not have to build a new building. Now is that sales or is that just getting better asset productivity and driving returns up? Well, it’s both. But the — I think we talked about in previous calls, there’s a — this is a low-margin business. So sales drives a low gross margin. To the extent that it can be done in a capital efficient way, that’s going to create returns immediately for shareholders. To the extent that we have more customers. Besides the gross margin, it also increases attractiveness to our suppliers who will then invest to try to grow with the customer base that we have.
