Shares of specialty foods distributor United Natural Foods, Inc. UNFI fell 8.52% in after-hours trading on Dec 7, after the company posted weaker-than-expected first quarter fiscal 2016 results. United Natural also lowered its outlook for fiscal 2016.
This Providence, RI-based company reported first quarter adjusted earnings of 63 cents per share. Earnings missed the Zacks Consensus Estimate of 69 cents by 8.7% and declined 4.5% from the prior-year quarter earnings of 66 cents due to lower gross and operating income margins.
The first quarter also reflected challenges in Canada, mainly due to continued foreign exchange headwinds and an inability to pass on price increases to retailers. Additionally, the quarter was impacted by a customer bad debt expense of $1.8 million or 2 cents.
Revenue and Margin Details
Net sales of $2.077 also billion lagged the Zacks Consensus Estimate of $2.094 billion by 0.8%, but increased 4.2% from the prior-year quarter. Excluding the impact of the termination of the Safeway Albertson’s contract, adjusted net sales increased 6.8% in the quarter. The e-commerce business grew almost 26% over the prior year quarter.
Despite a year-over-year increase in revenues, gross margin declined 89 basis points (bps) to 15.1% in the reported quarter. This was due to unfavorable mix as a result of lower gross margin associated with Tony’s Fine Foods. The remainder was due to unfavorable customer mix, moderated supplier promotional activity, lower fuel surcharges and currency headwinds.
Operating expenses ratio improved to 12.4% in the quarter, excluding the $2.8 billion in severance and other transactional costs associated with the restructuring plan. Operating expenses ratio was 13.1% for the same period last year. However, the current ratio includes a $1.8 million charge related to a customer bankruptcy outburst. Excluding the restructuring, and the customer bankruptcy impact, the operating expenses ratio improved 78 basis points in the reported quarter.
Adjusted operating income decreased 2.9% to $56.7 million, despite an increase in operating expenses ratio. Adjusted operating margin decreased 20 bps to 2.7%, due to higher depreciation of 12 basis points due to investments in new warehouses and technology and 9 basis points as result of customer bankruptcy.
Fiscal 2016 Guidance Revised
United Natural lowered its fiscal 2016 guidance, after reporting sluggish first quarter results. United Natural now expects adjusted earnings in the range of $2.79 to $2.89 per share, compared with $2.86 to $2.98 per share expected earlier. This marks a decrease of 2.1% to an increase of 1.4% over fiscal 2015 adjusted earnings per share of $2.85. The Zacks Consensus Estimate for fiscal 2016 is $2.92 per share.
Revenues are now expected in the range of $8.43 billion to $8.59 billion, lower than the previously guided range of $8.51 billion to $8.67 billion. The new revenue range marks an increase of approximately 3% to 5% over fiscal 2015.
Our Take
With increasing demand for a healthy lifestyle, food safety and environmental sustainability, the demand for organic products is growing rapidly. In addition, United Natural has taken the inorganic route to expand its distribution network, customer base and boost long-term growth. The company expects to see continued growth across protein, specialty and ethnic/gourmet both in terms of mergers and acquisitions as well as new customers and expansion of existing customer relationships.
However, we cannot ignore the fact that United Natural has been struggling with continued weakness in gross margins over the past few quarters due to a shift in customer mix to lower-margin supermarkets channel. Gross margin will continue to decline in the near term as competition increases both at retail and wholesale. Currency headwinds also remain a concern.
United Natural has a Zacks Rank #4 (Sell). Some better-ranked food companies include Campbell Soup Company CPB, B&G Foods, Inc. BGS and Omega Protein Corp. OME. All of them sport a Zacks Rank #1 (Strong Buy).
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