United Natural (UNFI) Reports Mixed Results, Cuts Sales View

Quarter in Detail

This leading distributor of food and non-food products in the U.S. and Canada reported third adjusted earnings of 77 cents that came ahead of the Zacks Consensus Estimate by a penny and remained flat with the prior-year quarter earnings. Earnings were positively impacted by top-line increase, despite being offset by higher operating expenses. Adjusted earnings took into consideration the restructuring expenses that were incurred during the quarter.

United Natural Foods, Inc. Price, Consensus and EPS Surprise

Revenue and Margin Details

Net sales of $2.37 billion lagged the Zacks Consensus Estimate of $2.42 billion and also came in below management’s expectations, primarily due to overall soft retail sales, margin expansion initiatives and reduced inflation. We note that sales have been lagging the Zacks Consensus Estimate for eleven straight quarters.

Nevertheless, sales increased 11.1% from the prior-year quarter, driven by the positive impacts of acquisitions of Haddon House Food Products, Nor-Cal Produce, Global Organic/Specialty Source and Gourmet Guru. Gross margin expanded 34 basis points (bps) from last year to 15.5% in the reported quarter. Gross margin growth was positively impacted by acquisitions. The management also recognizes the company’s focus on expense control that aided gross margin expansion, which was slightly offset by competitive pricing pressure and lack of adequate inflation.

United Natural continues to experience deflation pressures that went down 17 bps during the quarter. In terms of produce, deflation was approximately 2% as compared with the 1.3% inflation of the prior-year period.

Adjusted operating income increased 2.9% to $68.9 million for the quarter. Adjusted EBITDA was $90.4 million that increased 6.3% from the prior-year period.

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Synopsis of Segment Sales

From a channel point of view, supernatural net sales increased 4.8% than the prior-year quarter. It represented 33.7% of total net sales in the quarter that contracted 203 bps from the previous year.

Supermarket channel net sales increased 27.5% in the quarter. It represented 28.7% of total net sales that went up by 369 bps from the year-ago quarter.

Sales of the independent channel went up 7.3% in the third quarter and represented 26.9% of the company’s net sales.

Net sales of food services went up by 5.6%, while e-Commerce sales grew 12.3 approximately from last year. Neither food service nor e-commerce was significantly impacted by the recent acquisitions.

Other Financial Update

Cash and cash equivalents were $16.1 million at the end of Apr 29, while long-term debt was $152.9 million.

Capital expenditures were approximately $40 million in the quarter, resulting in free cash flow of $123.1 million.

At the end of the third quarter, on May 24, 2017 United Natural sold off their stake in Kicking Horse Coffee. The sale is expected to generate profits of $6.1 million in the fourth quarter of fiscal 2017.

Also, United Natural announced an extension to their restructuring plan announced on Mar 8, whereby the company expects additional restructuring charges between $3-$4.million for the fourth quarter fiscal 2017. During the third quarter, the company incurred restructuring charges of $3.9 million before taxes. The expenses are mainly related with severance and other employee separation costs driven by the recent integration and acquisition activities. These actions are expected to result in overall expense reductions in fiscal 2018.

Fiscal 2017 Guidance

United Natural has revised its fiscal 2017 sales guidance in view of the third quarter’s dismal performance. The company now expects net sales in the range of $9.29 billion to $9.34 billion, which is lower than the earlier projection of $9.38 billion to $9.46 billion.

Earnings for fiscal 2017 have been reiterated and are projected in the range of $2.49 to $2.54. The Zacks Consensus Estimate of $2.54 is at the higher end of the guidance range.

Our Take

United Natural has been able to thrive in the industry on the back of acquisition related gains. The company has been striving hard to continue the positive integration of their acquisitions and implementing efficiency within their internal activities. Nevertheless, the company has been grappling with heightened competition coupled with no meaningful improvement in inflation.

Stocks to Consider

Some better-ranked stocks that investors may consider includes; Constellation Brands, Inc. (NYSE:STZ) , MGP Ingredients, Inc. (NASDAQ:MGPI) and Energizer Holdings, Inc. (NYSE:ENR) , all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here .

Constellation Brands has an average positive earnings surprise of 7.7% over the trailing four quarters and a long-term earnings growth rate of 17.8%.

MGP Ingredients has an average positive earnings surprise of 27% over the trailing four quarters and a long-term earnings growth rate of 15%.

Energizer Holdings has an average positive earnings surprise of 21.6% over the trailing four quarters and a long-term earnings growth rate of 9.8%.

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