Profits Soar at UNFI, but Sales Miss Analysts' Mark

DAYVILLE, Conn. -- Sharing a fate similar to one of its biggest customers, Whole Foods, United Natural Foods, Inc. (UNFI) here yesterday took lumps from Wall Street even though it reported net income of $12.7 million for the fourth quarter ended July 29, a 7.6 percent increase over the previous year, and net sales of $619.8 million, up $76.8 million, or 14.1 percent, from last year. The problem: the natural foods wholesaler still fell short of analysts' high expectations, which on average predicted sales of $630.5 million.

UNFI attributed the gap between results and expectations to such factors as soft sales in certain of its regions, higher fuel prices, the adoption of share-based compensation, and costs related to the startup of a new location of the company's Albert's Organics division in Greenwood, Ind.

Also during the fourth quarter, UNFI said it recorded a nonrecurring loss on the sale of certain equipment held for sale at the its Auburn, Calif. facility of $0.5 million.

UNFI president and c.e.o. Michael Funk was upbeat. "We had another strong year and are extremely pleased with the company's financial and operating performance in fiscal 2006," he said. "Our financial success reflects the positioning of our sales and marketing strategies, which have enabled us to achieve growth above industry levels across our primary distribution channels. Our team of associates continues to execute our strategy in each of our markets, and we remain focused on serving our growing customer base. In addition, we continue to efficiently leverage our expenses."

Funk noted that UNFI's conventional supermarket sales increased more than 30 percent, and that the channel now accounted for 15.1 percent of the company's total business. "We landed a lot of new doors with chains primarily in the Eastern region," offsetting sluggish sales in other parts of the country, he said.

"Throughout fiscal 2006, we improved our operating expenses over last year, in spite of higher fuel costs and operating expenses associated with the adoption of share-based compensation," Funk said. "Our net sales, net income, and earnings per share, excluding special items, all met or exceeded the high end of our initial guidance, reaffirming our position within the industry and validating our operating strategies. At the same time, we continued to strengthen our industry presence by growing our branded products business and fostering new business relationships with new and emerging customers in the industry."

The company's net income, excluding special items, for fiscal 2006 rose $4.4 million, or 10.5 percent, to $46.1 million, or $1.09 per share, from $41.7 million, or $1 per share, for fiscal 2005. Fiscal 2006 net income, including special items, came to $43.3 million, or $1.02, vs. $41.6 million, or $1, last year. For fiscal 2006, share-based compensation adversely affected earnings before taxes by $5.5 million, or about eight cents per diluted share.

Net sales for fiscal 2006 were $2.43 billion, a rise of 18.2 percent, or $374.0 million, over the year-ago period. Fiscal 2006 revenue growth, excluding acquisitions, was 16.6 percent compared with last year.

For fiscal 2007, the company expects revenues to increase about 11 percent to 15 percent from fiscal 2006 to a range of $2.7 billion to $2.8 billion, with fiscal 2007 earnings per diluted share in the range of $1.25 to $1.30 per share, an increase of 15 percent to 19 percent over fiscal 2006, excluding special items.

Additionally, UNFI said that it expected to spend $40 million to $45 million on an aggressive cap ex program during fiscal 2007, with new facilities scheduled to be built in Florida, Texas, and the Pacific Northwest over the next 18 to 24 months. In a conference call yesterday Funk said that the company hoped to have one new facility open by this coming summer and another one underway, with a third one slated to begin construction in 2008.

The news of an upcoming Texas facility sparked speculation among the analysts on the firm's conference call yesterday that the wholesaler was angling to become the primary supplier for Austin, Texas-based Whole Foods. UNFI, which has a contract with Whole Foods through the end of 2007 as a "strong secondary supplier" and currently services the retailer from its Colorado facility, would only say that it was making "good progress toward securing a long-term relationship" with the company, in Funk's words.

"As we look ahead, we are excited about our company's prospects for fiscal 2007 and beyond," Funk said. "Our efforts remain focused on helping our customers be more successful in their marketplace while improving our service levels and maintaining our position as America's premier certified organic distributor. We will continue to invest in our people, facilities, equipment and new technologies while providing high-quality product assortments and value-added support services."

UNFI carries and distributes over 40,000 products to more than 20,000 retail customers across the United States. The company serves a variety of retail formats, among them conventional supermarket chains, natural product superstores, independent retail operators, and the foodservice channel.
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