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United Natural (UNFI) Q1 Earnings Miss, Sales Beat Estimates


United Natural Foods, Inc. UNFI reported mixed first-quarter fiscal 2019 results, wherein earnings missed the Zacks Consensus Estimate but net sales surpassed the same. Notably, the bottom line fell short of the consensus mark for the second straight quarter.

Following the results, shares of the company declined 7.8% during yesterday’s after-market trading. Also, in a year’s time, the stock has witnessed a sharp decline of 50.5% against the industry’s 0.7% growth. Like many other food companies, United Natural has been battling freight cost headwinds for a while now.

Q1 Highlights

United Natural’s earnings of 59 cents per share, decreased 1.7% on a year-over-year basis. Excluding certain items, adjusted earnings came in at 55 cents, missing the Zacks Consensus Estimate of 74 cents. The bottom line in the quarter was impacted by rise in interest expenses.

Interest expenses of this distributor of food and non-food products (excluding expenses of $0.7 million owing to interest on the SUPERVALU senior notes) totaled $7.0 million compared with $3.7 million in the prior-year quarter.

Net sales increased 16.7% year over year to $2,868.2 million and exceeded the Zacks Consensus Estimate of $2,686 million. The uptick was driven by consistent strength in product demand. In fact, the metric grew across Supernatural, Independents and Independents channels as well.

Meanwhile, the company’s adjusted gross margin contracted 50 basis points (bps) to 14.4% on account of an unfavorable shift in consumer mix. Higher inbound freight costs also weighed on gross margin during the reported quarter.

Adjusted operating income declined 7.4% to $51 million due to gross margin contraction and increase in labor costs. However, the adjusted EBITDA were up 1.7% to $86.2 million.

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

Segment Sales

From a channel point of view, supernatural net sales surged 20.4% year over year, accounting for 35.8% of total net sales in the first quarter.

Conventional supermarket channel net sales rose 0.6%, representing 24.7% of total net sales.

Sales at the independently owned natural retailers jumped 4.4% and represented 23.3% of the company’s net sales.

At the other channel, net sales dipped 7.3% and constituted 8.5% of United Natural’s top line.

Other Financial Updates

United Natural ended the quarter with cash and cash equivalents of $53.9 million, long-term debt (excluding current portion) of nearly $1,924.2 million and total shareholders’ equity of approximately $1,830.3 million.

In the reported quarter, net cash used in operating activities was $107 million compared with $40.2 million in the prior-year quarter. Capital expenditures were approximately $16.4 million during the first quarter.

Fiscal 2019 Guidance

United Natural recently acquired SUPERVALU. The enhanced scale of the combined entities is anticipated to radically boost United Natural’s efficiency in operations. Moreover, the merger is expected to provide better competing grounds to the company in the grocery space by augmenting offerings. In the third year of the deal, it expects to realize net run-rate cost synergies worth more than $175 million. Synergies worth more than $185 million are expected to be generated in the fourth year.

Following the acquisition of SUPERVALU, the company has updated its fiscal 2019 guidance. For fiscal 2019, management projects net sales to be $21.5-$22 billion.

Adjusted earnings in the fiscal year are anticipated to be $1.69-$1.89 per share. The current Zacks Consensus Estimate is pegged at $3.44.

On a GAAP basis, the bottom line is envisioned to be in the range of loss of 19 cents to earnings of 1 cent per share.

Zacks Rank & Key Picks

United Natural has a Zacks Rank #3 (Hold). Better-ranked stocks worth considering in the same space include General Mills, Inc. GIS, McCormick & Company, Incorporated MKC and Lamb Weston Holdings, Inc. LW, each carrying the same rank as United Natural. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

General Mills reported better-than-expected earnings in the trailing four quarters, the average being 4.8%.

McCormick & Company has an impressive long-term earnings growth rate of 9%.

Lamb Weston Holdings posted earnings beat in the preceding four quarters, the average being 7%.

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