Seven of UNFI's top eight customers now use UNFI as both their primary natural and conventional distributor
For its 13-week first quarter of fiscal 2020 ended Nov. 2, United Natural Foods Inc. (UNFI) has reported a net sales increase to $6 billion, including an incremental $3.1 billion from Supervalu, which it acquired in October 2018. During the quarter, however, the wholesaler’s operating and net losses grew, as did its total outstanding debt, net of cash, and its gross margin declined slightly, as it continued to work through the integration process.
“We entered the new fiscal year operating with an unmatched geographic footprint, the largest variety of products and services in the industry, and the critical scale needed to succeed over the long term,” noted Steven L. Spinner, chairman and CEO of Providence, R.I.-based UNFI. “We delivered first-quarter results in line with our expectations and are pleased to reaffirm our fiscal 2020 outlook for net sales, adjusted EBITDA and adjusted [earnings per share (EPS)]. We remain confident that UNFI is well positioned today and for the future to deliver an industry-leading and sustainable supply chain platform for all customer channels. As we look to the remainder of fiscal 2020, we are committed to converting our sales momentum into improved earnings and cash flow.”
Net sales from continuing operations by customer channel for Q1 2020 compared to the first quarter of fiscal 2019 rose 305.3% for supermarkets, 8.2% for supernaturals, 13.6% for independents and 56.1% for other retailers, for total net sales growth of 109.9%.
During Q1 2020, UNFI adjusted the presentation of its net sales by customer channel to reflect reclassification of customer types resulting from its determination that a customer serviced by both Supervalu and legacy UNFI should be classified as a supermarket customer given that customer’s operations. Further, during Q2 2019, net sales attributable to Supervalu were incorporated into the UNFI’s definition of sales by customer channel. As a result of these adjustments, net sales to UNFI’s supermarket channel for Q1 2019 increased by about $223 million compared with previously reported amounts, while net sales to the other retailer channel increased by about $1 million, with an offsetting elimination of the Supervalu customer channel.
Gross margin for UNFI’s Q1 2020 was 12.81% of net sales, versus 14.38% for the year-ago period, which included a $1.8 million, or 0.06% of net sales, inventory fair-value adjustment related to the Supervalu acquisition. According to the company, the gross margin rate decline was mainly due to the addition of Supervalu at a lower gross profit rate.
UNFI’s operating loss was $444 million in Q1 2020, up from $18.8 million last year, and included goodwill and asset impairment charges of $425.4 million; expenses relating to restructuring, acquisition and integration of $14.3 million; customer notes receivable charges of $12.5 million; closed property expense of $3.6 million, and a legal reserve charge of $1.9 million. Excluding these items, operating income was $13.6 million, or 0.23% of net sales, in Q1 2020, versus $51.0 million, or 1.78% of net sales in Q1 2019. UNFI attributed the decrease in adjusted operating income, as a percent of net sales, to lower gross margins, as a percent of net sales, and higher depreciation and amortization expense both resulting from the Supervalu acquisition.
UNFI’s net loss for Q1 2020 was $383.9 million, including $25 million of income related to discontinued operations, compared with $19.3 million for the year-ago period. According to the company, this was primarily the result of the goodwill and asset impairment charges, higher depreciation and amortization expense, and higher interest expense, partly offset by lower restructuring, acquisition, and integration expenses and the benefit of higher net income from discontinued operations.
UNFI’s net loss per diluted share was $7.21 for Q1 2020, compared with 38 cents for Q1 2019. Adjusted EPS was 12 cents for Q1 2020, versus 59 cents last year, reflecting higher interest expense and lower operating income, offset in part by net income from discontinued operations. Q1 2020 Adjusted EBITDA at UNFI was $121.7 million, compared with $86.2 million for the year-ago period, mainly driven by the addition of Supervalu.
UNFI’s total outstanding debt, net of cash, grew in Q1 2020 versus last year because of an increase in working capital to support the holiday selling period, the company noted, adding that it expects the increase in working capital to reverse by the end of Q2.
In its Q1 2020 earnings presentation, 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.
“[T]his was the first quarter that our combined sales organization was in place, and we began to see the promise of cross-selling legacy portfolios into our existing customer base. We expect larger wins will come as we leverage long-standing relationships in our newly combined product portfolio,” Spinner said during the earnings call, during which he noted that seven of UNFI’s top eight customers now use it as both their primary natural and conventional distributor.
On the call, Spinner also discussed the consolidation of UNFI’s distribution centers in the Pacific Northwest and Northern California, and its expansion in Southern California.
No. 30 on Progressive Grocer’s 2019 Super 50 list of the top grocers in the United States, 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 Minneapolis-based Supervalu, UNFI is the largest publicly traded grocery distributor in the United States.