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United Natural's (UNFI) Q3 Earnings Miss Estimates, Jump Y/Y

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United Natural Foods, Inc. (UNFI - Free Report) reported third-quarter fiscal 2020 results, wherein both top and bottom lines missed the Zacks Consensus Estimate. Shares of the company declined 20.2% during yesterday’s trading session. Industry experts believe that investors’ sentiments were hurt due to the company’s plans to continue operating its Cub Foods banner and certain Shopper Foods stores for up to 24 months, thereby delaying its planned sale.

United Natural was earlier on track to sell some Shoppers stores this year as part of its efforts to divest the retail business. However, the company now expects to continue operating its Cub Foods banner as well as certain Shoppers Food Warehouse stores for up to 24 months. Hence, it has offered an updated fiscal 2020 guidance, which reflects inclusion of Cub Foods and some Shoppers Food Warehouse stores as part of its continuing operations. The same is likely to be witnessed in the company’s fourth-quarter results. In fact, management stated that as an interim step, it is in the process of separating Cubs from United Natural. Hence, Cub will operate more as a standalone firm, once the separation is concluded. Experts believe that this decision reflects a lack of buyer interest.

Nonetheless, both earnings and sales surged year over year in the third quarter, gaining from the burgeoning demand stemming from the coronavirus-led pantry loading of essential items. These trends continued into the fourth quarter with wholesale net sales for the first four weeks of the quarter up approximately 11%. Notably, the company is on track to generate cross-selling revenues of more than $175 million this year.

Q3 in Detail

United Natural’s adjusted earnings of $1.40 per share fell a penny short of the Zacks Consensus Estimate. Nonetheless, the bottom line grew significantly from 61 cents in the year-ago period. The year-over-year surge can be attributable to greater net sales as well as fixed cost leverage, somewhat countered by soft gross margin and higher costs associated with COVID-19. These include costs to maintain additional safety, increased labor costs to manage higher volumes, and payments and incentives to frontline workers amid the pandemic.

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

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

United Natural Foods, Inc. price-consensus-eps-surprise-chart | United Natural Foods, Inc. Quote

Net sales advanced 11.8% to $6,667.7 million, though it missed the Zacks Consensus Estimate of $6,669.5 million. Sales growth was backed by robust demand stemming from the coronavirus-led stockpiling and increased at-home consumption, including gains from cross selling and solid performance of private brands. Other food stocks gaining from the coronavirus-led demand spike include Kellogg (K - Free Report) , Flowers Foods (FLO - Free Report) and B&G Foods (BGS - Free Report) . Meanwhile, United Natural’s third-quarter sales were partly hurt by the effects of customer bankruptcies that took place in the second quarter of fiscal 2020.

Meanwhile, the company’s gross margin contracted 37 basis points (bps) to 12.85% due to an unfavorable mix shift toward lower margin conventional products and reduced vendor funding. This was partly made up by lower inventory shrink levels.

Adjusted operating income came in at $82.2 million in the quarter, up from $50.9 million reported in the year-ago period. Adjusted operating margin grew from 0.85% to 1.23% of net sales, courtesy of higher sales and reduced operating expenses, partially offset by a decline in gross margin. Adjusted EBITDA jumped almost 32% to $222.2 million, thanks to improved sales, fixed cost leverage and synergy gains from Supervalu’s integration. Results were partly affected by lower gross margin and COVID-19-related costs. Incidentally, COVID-19-related operating costs amounted to roughly $20 million in the quarter.

Segment Sales

From a channel point of view, Supernatural net sales rose more than 16% year over year, continuing its robust trend that was further enhanced by the coronavirus-led demand.

Supermarkets channel net sales grew 15% and contributed about two-thirds of total sales.

Sales in the Independents channel (forming 10% of net sales) fell roughly 3% on account of customer bankruptcies partly made up by pantry-loading trends amid the pandemic.

In the Other channel, net sales dropped 3% as solid growth from two of the biggest e-commerce customers was more than negated by softness in foodservice sales and military sales.

Other Financial Updates

The company ended the quarter with cash and cash equivalents of $56.4 million, long-term debt of $2,541.7 million and total shareholders’ equity of roughly $1,168 million. During the third quarter, United Natural’s total debt (net of cash) declined $302 million on a sequential basis.

Fiscal 2020 Guidance

United Natural’s ability to cater to the rising demand amid the pandemic reflects its robust market position and the important role it plays in North America’s food supply chain. The company expects demand for its natural, fresh and conventional products to remain high. This along with integration synergies related to Supervalu is expected to help United Natural end fiscal 2020 on a strong note.

The company, which had withdrawn its fiscal guidance on May 12, has now offered an updated view that reflects the impact of including Retail in continuing operations. For fiscal 2020, management now anticipates net sales of $26.4-$26.6 billion compared with $23.5-$24.3 billion projected during the second-quarter earnings call.

Adjusted EBITDA is now anticipated in a band of $655-$670 million, up from the previous view of $520-$560 million. The company now envisions adjusted earnings per share in the range of $2.30-$2.50, significantly higher than the old guidance of 85 cents to $1.45 per share.

We note that this Zacks Rank #1 (Strong Buy) stock has more than doubled in the past three months compared with the industry’s growth of 25.8%. You can see the complete list of today’s Zacks #1 Rank stocks here.

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