Coronavirus Sales a Bright Spot for UNFI
United Natural Foods Inc. says it is experiencing “significant” growth in sales due to the coronavirus outbreak.
In a second quarter earnings call, UNFI CEO Steven Spinner told analysts that the company is still watching to see what happens, but that “when you look at year-over-year growth, over the last two weeks, our business is up double-digit versus prior year. That's a big number."
Spinner speculated as to whether consumers worried over COVID-19 are buying more groceries versus eating out.
“Are we going to see more and more people leaving the restaurants and eating at home? That's possible. Are consumers loading their pantries? That's possible. But obviously it's very early,” Spinner said. “And so we certainly are uncomfortable making any predictions as to what this does to UNFI for the rest of the year, given the fact that right now, our primary focus is safety, security of the teams, security of the customers, making sure that our distribution centers are operating in a very, very clean and careful and disciplined way and, obviously making sure we get the product out into the retailer.”
Spinner identified around 400 items that are having the most lift, including frozen vegetables, frozen fruits, general staples, canned goods, rice, nuts and other food categories.
For the second quarter ended Feb. 1, UNFI had net sales of $6.14 billion compared to $6.15 billion in last year's fiscal second quarter. That number matched analysts’ estimates. Adjusted earnings per share (EPS) was 32 cents, which beat Wall Street’s estimate of 27 cents. UNFI had a net loss of -$30.7 million. That’s a 91.02% improvement over the company’s net loss of -$341.73 million from the same period of the year prior.
"Despite considerable industry headwinds, I'm encouraged by our underlying performance and the momentum that is building within our business,” Spinner said. “Prior to charges associated with the three customer bankruptcies that impacted the quarter, we grew Adjusted EBITDA by low double digits, and we remain optimistic as we move into the second half of our fiscal year and confident in UNFI's long-term growth prospects."
Gross margin for the second quarter of fiscal 2020 was 12.63% of net sales compared to 12.39% of net sales for the second quarter of fiscal 2019, which included an $8.6 million, or 0.14% of net sales, inventory fair value adjustment related to the Supervalu acquisition. When excluding this charge, gross margin in the second quarter of fiscal 2019 was 12.53% of net sales. The increase in gross margin rate was primarily driven by lower inbound freight expense.
Operating expenses in the second quarter of fiscal 2020 were $750.8 million, or 12.23% of net sales, compared to $751.9 million, also 12.23% of net sales, for the second quarter of fiscal 2019. Operating expenses in the second quarter of fiscal 2020 and fiscal 2019, as a percent of net sales, were approximately equal as cost savings in the second quarter of fiscal 2020 were offset by approximately $28.9 million, or 0.47% of net sales, of bad debt expense associated with customer bankruptcies.
Restructuring, acquisition and integration related expenses in the second quarter of fiscal 2020 were $29.7 million, including costs and charges related to the disposal of existing retail and surplus real estate, distribution network consolidation, and employee-related costs, compared to $47.1 million in the second quarter of fiscal 2019.
Operating (loss) income in the second quarter of fiscal 2020 was $(5.1) million and included expense of $33.1 million associated with customer bankruptcies and $29.7 million of restructuring, acquisition and integration related expenses.
Net loss for the second quarter of fiscal 2020 was $(30.7) million compared to $(341.7) million for the second quarter of fiscal 2019.
UNFI says it is selling the real estate of 15 Cub Foods stores to raise cash to pay down debt. The company will sell the stores for $170 million, and then pay rent on the spaces. The sale represents 1.1 million square feet of retail space. It is expected to close by August.
"You don't have to be a rocket scientist to figure out that this is a really tough climate to sell retail and Cub is an incredibly strong banner," Spinner said. "It's number-one market share, makes a lot of money, it throws off a lot of cash. And so we're just not going to give it away. The process is taking longer than I think we had expected, just because of the general climate within retail."
In its Q1 2020 earnings report, UNFI noted that “[d]ivesting [the] Cub banner in its entirety by the end of fiscal 2020 continues to be our goal,” with net proceeds realized from banner divestitures to be used to reduce debt. The company earlier revealed that it’s selling 13 Shoppers Food & Pharmacy stores, many of which it will be retaining supply agreements for, as Spinner noted in the company’s earnings call, and closing four more, while continuing marketing efforts for the remaining 26 locations, as well as for Cub. Shoppers and Cub are the last two retail banners operated by UNFI.
Providence, R.I.-based UNFI delivers products to customer locations throughout North America, including natural product superstores, independent retailers, conventional supermarket chains, ecommerce retailers and foodservice customers. Combined with Supervalu, UNFI is the largest publicly traded grocery distributor in the United States, and is No. 30 on Progressive Grocer’s 2019 Super 50 list of the top grocers in the United States.