United Natural (UNFI) Beats On Q2 Earnings, Sales Up Y/Y

United Natural Foods, Inc. (NYSE:UNFI) released second-quarter fiscal 2019 results, with earnings and sales beating the Zacks Consensus Estimate. Also, the top line improved year on year. Further, the company updated the view for fiscal 2019.

However, we note that bottom line fell year on year due to lower operating income and high interest expenses. Higher expenses associated with the acquisition of SUPERVALU dented performance in the reported quarter. Such aspects seem to have marred investors’ optimism in the stock that declined nearly 3.5% in the after-market trading hours on Mar 5. Also, in the past six months, the stock plunged 56.4% compared with the industry’s fall of 11.9%.

Q2 Highlights

United Natural’s earnings of 44 cents per share surpassed the Zacks Consensus Estimate of 23 cents, but declined as much as 38% on a year-over-year basis. The bottom line in the quarter was impacted by rise in interest expenses and lower operating income.

Net sales amounted to 6,149.2 million, depicting a radical increase of almost $3,621.1 million from the year-ago quarter’s tally. Also, the top line exceeded the Zacks Consensus Estimate of $5,995 million. SUPERVALU contributed nearly $3.47 billion to sales, which was a major upside. The Supernatural and Independents channels also continued to perform well. Consistent strength in product demand fueled performance in the quarter. Further, legacy sales increased nearly 5.8%.

Meanwhile, the company’s adjusted gross margin contracted 217 basis points (bps) to 12.5% due to unfavorable shift in consumer mix as well as the inclusion of SUPERVALU, which contributed at a reduced gross profit rate. Declines in legacy SUPERVALU distribution centers also impacted the metric.

Further, adjusted operating income fell almost 64% to $18.5 million due to gross margin contraction and increased operating expenses. Nevertheless, adjusted EBITDA went up almost 79% to $143 million in the said quarter.

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

Segment Sales

From a channel point of view, supernatural net sales surged 18.2% year over year, contributing 36.8% to total net sales in the second quarter.

Supermarket channel net sales rose substantially and contributed 63.5% to net sales. Excluding SUPERVALU, the segment’s legacy sales declined nearly 1.4%.

Sales in the independent channel rallied 25.3% and contributed 13.2% to net sales. Excluding SUPERVALU’s impact, net sales in this unit improved 4.6%.

In the other channel, net sales improved 44% and contributed 5.5% to United Natural’s top line. On a legacy basis, the unit’s sales deteriorated 17.4%, thanks to a soft e-commerce platform.

Other Financial Updates

This Zacks Rank #3 (Hold) company ended the quarter with cash and cash equivalents of $49.5 million, long-term debt of nearly $2,965.3 million and total shareholders’ equity of approximately $1,483.4 million.

In the reported quarter, net cash provided by operating activities was roughly $25.9 million. Capital expenditures were approximately $80.1 million during the second quarter.

Fiscal 2019 Guidance

Management highlighted that the company is progressing well with the integration of SUPERVALU. Although the company is currently experiencing higher costs related to SUPERVALU, it is focusing on making improvements and expects such headwinds to subside in the forthcoming periods.

That said, the company updated fiscal 2019 guidance. Net sales continue to be projected in the band of $21.5-$22 billion. Adjusted earnings are anticipated to be $2-$2.40 per share compared with the earlier view of $1.69-$1.89. The Zacks Consensus Estimate is currently pegged lower at $1.73. On a GAAP basis, the company envisions loss in the range of $6.10-$6.50.

Further, adjusted EBITDA is expected in the range of $580-$610 million, down from the previous view of $650-$665 million.

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