Specialty foods distributor, United Natural Foods, Inc. (UNFI) delivered upbeat first quarter fiscal 2015 results.
First quarter fiscal 2015 earnings of 66 cents per share beat the Zacks Consensus Estimate of 63 cents by 4.8% and the prior year adjusted earnings of 56 cents by 17.9%. Earnings were driven by top-line growth and robust acquisitions.
Revenue and Margin Details
Net sales for the quarter increased 24.4% year over year to $1.99 billion and exceeded the Zacks Consensus Estimate of $1.95 billion by 1.8%. The results were driven by continuous increase in demand for the company’s organic and natural food products and robust acquisitions.
Trudeau Foods (acquired in the first quarter of fiscal 2014) and Tony’s Fine Foods (acquired during fourth quarter fiscal 2014) together contributed significant net sales of approximately $227.7 million. Excluding acquisitions, sales grew 10.2% during the quarter.
Supermarket sales increased 30.6% in the first quarter and represented 27% of total sales. Supernatural channel sales increased 16.5% and represented 33% of sales in the first quarter of fiscal 2015. Sales growth in the Independent channel was 23.8% and it constituted approximately 33% of total sales. Food service comprised approximately 4% of total sales and increased 60.4% in the first quarter.
Gross margin declined 92 basis points to 16.0% in the reported quarter. The main reason for the decline was due to the impact of lower gross margin associated with Tony’s Fine Foods. The remainder was mostly due to unfavorable customer mix, higher freight costs and currency headwinds.
The company’s adjusted operating expenses increased 16.8% in the first quarter to $262.5 million. However, adjusted operating income margin declined 4 basis points to 2.9%.
Fiscal 2015 Guidance
United Natural also reiterated its guidance for fiscal 2015. It continues to expect sales in the range of $8.13 billion to $8.38 billion. This marks an increase of 19.7% to 23.7% over fiscal 2014 sales of $6.79 billion. The company continues to expect Tony's Fine Foods acquisition to be the prime driver of revenues in 2015, fueled by high demand for perishable specialty products.
The company estimates earnings for fiscal 2015 in the range of approximately $2.88 – $3.01 per share. This marks an increase of approximately 14.3% to 19.4% over fiscal 2014 earnings of $2.52 per share.
The company believes that the strategy to sell stores to existing customers as well as infrastructure improvements should drive 10% to 14% revenue growth, 10% to 16% EBIT growth, generate free cash flow of $30 million to $85 million per year and lead to EPS expansion of 14% to 19% per year over the next five years.
Our Take
With increasing demand for a healthy lifestyle, food safety and environmental sustainability, the demand for organic products is growing rapidly. Moreover, it is believed that the growth rate of the natural products industry has outpaced the growth of the overall food-at-home industry.
In addition, United Natural has taken the inorganic route to expand its distribution network, customer base and boost long-term growth. The company acquired Trudeau Foods during first quarter fiscal 2014, which helped it to enhance its position and increase its market share in the specialty products industry.
The acquisition also helped United Natural to expand its products in the markets of Minnesota, North Dakota, Wisconsin and Michigan’s Upper Peninsula. We expect the company’s acquisition of Tony’s Fine Foods to broaden its reach across all of its markets.
United Natural currently holds a Zacks Rank #3 (Hold). Some better-ranked food companies include Aramark Holding (ARMK), Dr Pepper Snapple Group, Inc. (DPS) and Keurig Green Mountain, Inc. (GMCR). While Aramark sports a Zacks Rank #1 (Strong Buy), Dr. Pepper Snapple and Keurig Green Mountain hold a Zacks Rank #2 (Buy).
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