United Natural (UNFI) Falls On Q1 Earnings And Sales Miss
Zacks Investment Research | Dec 07, 2016 10:19PM ET
Shares of specialty foods distributor United Natural Foods, Inc. (NASDAQ:UNFI) declined 4.26% in afterhours trading on Dec 7, after the company posted weaker-than-expected first quarter of fiscal 2017 results. Both earnings and revenues lagged the Zacks Consensus Estimate. Further, the company reiterated its fiscal 2017 view.
This Providence, RI-based company reported first quarter adjusted earnings of 58 cents per share. Earnings lagged the Zacks Consensus Estimate of 62 cents by 6.5% and declined 3.3% from the prior-year quarter earnings of 60 cents due to lower operating income margins.
Revenue and Margin Details
Net sales of $2.28 billion also lagged the Zacks Consensus Estimate of $2.32 billion by 1.8% but increased 9.7% from the prior-year quarter. Net sales in the quarter include the impact of the previously disclosed termination of a customer distribution contract. Excluding this, adjusted net sales increased 12.9% in the quarter. Acquisitions of Gourmet Guru in August, Haddon House Food Products, Inc. (“Haddon”) in May, and Nor-Cal Produce, Inc. ("Nor-Cal") in April contributed approximately 8 percentage points to net sales. This excludes the acquisition of Global Organic/Specialty Source, Inc. ("Global Organic"), acquired in March, which was integrated into the Albert’s business in the fourth quarter of fiscal 2016.
United Natural has exhibited a bullish run on the index year to date. We note that in the said period the stock surged 24.7% and comfortably outperformed the Zacks categorized Food-Miscellaneous/Diversified Market industry, which showcased growth of just 2.6%.
Gross margin expanded 20 basis points (bps) to 15.3% in the reported quarter. The increase was driven by top-line growth and favorable impact of acquisitions, which tend to generate higher gross margins by providing more value added services. Despite margin growth, we note that gross margins continued to remain challenging due to competitive pricing pressure, moderated supplier promotional activity, and a reduction in fuel surcharges.
The company also faced modest deflation of 13 basis points in the quarter, which impacted categories such as produce, meat and cheese. In fact, this was the first quarter of deflation for United Natural in at least seven years.
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Adjusted operating margin decreased 26 bps to 2.34% due to higher operating costs related to acquisitions.
Segment Details
From a channel perspective, supernatural's net sales increased 4.6% over the prior year quarter and represented 32.8% of total net sales in the quarter.
Supermarket channel net sales increased 13.5% in the quarter and represented 28.6% of total net sales. Excluding the customer contract termination, supermarkets grew 26.3% in the first quarter, driven by its recent acquisitions.
The independent channel grew 10% in the first quarter and represented 27.3% of the company’s net sales.
Food service sales were up 8.1% in the first quarter and e-commerce net sales continued to be strong, increasing approximately 22.4% over the prior-year quarter.
Other Financial Update
Cash and cash equivalents were $13.6 million at the end of Oct 29, while long-term debt was $161.1 million.
Capital expenditures were approximately $9.2 million in the quarter. The company had negative free cash flow of $16.5 million in the quarter compared with negative free cash flow of $2 million in the year-ago quarter.
Fiscal 2017 Guidance Reiterated
United Natural has reiterated its fiscal 2017 sales and earnings guidance, in view of its newly signed business and margin enhancement initiatives. For fiscal 2017, this Zacks Rank #3 (Hold) company expects net sales in the range of approximately $9.43 billion to $9.60 billion, which is up approximately 11.3% to 13.3% over fiscal 2016 net sales of $8.47 billion.
Reported earnings for fiscal 2017 are now estimated in the range of $2.53 to $2.63 per share, up 1.2% to 5.2% from fiscal 2016 earnings of $2.50 per share. The Zacks Consensus Estimate of $2.59 is within the guidance range.
Our Take
The company is putting in efforts to build out its store strategy and enhance its business through acquisitions. In the past 12 months, the company has acquired four exciting and uniquely positioned companies including Haddon House specialty foods, Global Organic, Nor-Cal and Gourmet Guru. With these companies, United Natural is now positioned as a large national provider of fresh produce, proteins, bakery, deli, specialty and natural products.
Though encouraged by consumers’ increasing demand for organic products, driven by a healthy lifestyle, food safety and environmental sustainability, we cannot ignore the fact that the company has been struggling from continued weakness in gross margin over the past few quarters. This is due to a shift in customer mix to the lower-margin supermarkets channel. The company’s recent acquisitions, despite being accretive to the top line, put pressure on margins. The deflationary pressures are also affecting the produce and protein categories.
Stocks to Consider
Some better-ranked stocks in the broader consumer staples sector include Mondelez International, Inc. (NASDAQ:MDLZ) , Lancaster Colony Corporation (NASDAQ:LANC) and Sysco Corporation (NYSE:SYY) . All of them carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
Mondelez International has an expected earnings growth rate of 13.12%. Further, it has delivered positive earnings surprise in three out of the four trailing quarters, leading to an average earnings surprise of 11.20%.
While Lancaster Colony has an expected earnings growth rate of 3.00%, Sysco has an expected earnings growth rate of 8.83%.
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