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United Natural Foods, Inc. (UNFI -0.68%)
Q1 2018 Earnings Conference Call
Dec. 7, 2017, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Greetings, and welcome to the United Natural Foods Inc. First Quarter 2018 Earnings Conference Call.
At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press *1 on your keypad. As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Katie Turner, for opening remarks.
Katie Turner -- Investor Relations
Thank you. Good afternoon, and thank you for joining us on UNFI's First Quarter Fiscal 2018 Earnings Conference Call. By now, you should have received a copy of the earnings release issued this afternoon. This press release and webcast of today's call are available under the Investors section of the company's website, at www.unfi.com. On the call today are Steve Spinner, Chairman and CEO; Sean Griffin, Chief Operating Officer; and Mike Zechmeister, Chief Financial Officer.
Before we begin, we would like to remind everyone that comments made by management during today's call may contain forward-looking statements. These forward-looking statements assess plans, expectations, estimates and projections that might involve significant risks and uncertainties. These risks are discussed in our earnings release and SEC filings. Actual results may differ materially from the results discussed in these forward-looking statements.
In addition, in today's earnings release and during the call, management will provide GAAP and non-GAAP financial measures. These non-GAAP financial measures include EBITDA, EBITDA margin, free cash flow, and leverage. A complete reconciliation and explanation of these data changes and reconciliations to the most directly comparable GAAP measures is located on the Investors section of the company's website.
And I'd now like to turn the call over to Steve Spinner.
Steve Spinner -- Chairman and Chief Executive Officer
Thank you, Katie. Good evening, everyone. Today, we're excited to discuss our first quarter business highlights and then Mike will review our financial results and annual guidance. Finally, Sean, Mike, and I will take your questions once we've finished our prepared remarks. We're out of the gate in our first quarter Fiscal Year 2018 with very strong topline growth, which we will expect to continue throughout our fiscal year.
All of our significant customer channels saw broad-based growth with our broadline business shipping over 100 million units and leading UNFI to record quarterly sales of $2.4 billion in the first quarter. We are very encouraged by what we see. It's increasing and broad-based demand for the capabilities and solutions UNFI provides to our very diverse customer base. We expect this business momentum to continue for the balance of the year, as reflected in our increased sales and earnings guidance for fiscal 2018, which Mike will address shortly.
We believe we are uniquely positioned and, in the nexus of robust industry activity and interest in better-for-you food products and services across brick-and-mortar retail, e-commerce, food service, and international relationships. Wherever the demand is, we believe UNFI is the preferred solution.
As the aforementioned momentum came on quite quickly, our ability to respond and execute at a high service and low-cost manner was challenged during the quarter. Typically, our operational teams would plan and prepare several months in advance for the type of ramp-up we saw in Q1 -- in this case, we adjusted in real-time. We did incur higher than normal overtime and outside storage expenses, leading to overall lower productivity levels and higher expense ratios.
I would really like to solute UNFI's management and associates teams who worked tirelessly and around the clock -- including dealing with two hurricanes -- to minimize service disruptions to our customers. From selectors, to loaders, to drivers, and buyers, our staff demonstrated how they could rise to meet the challenge.
As we move into our second quarter, we are continuing to see record sales and shipping unit volume and have made the appropriate staffing and facility adjustments. Additionally, associated with the unexpected demand are inbound co-rates from our supply partners was and continues to be a challenge. Suppliers out of stocks in the first quarter of Fiscal Year '18 versus the same quarter in the prior year were almost 250 basis points unfavorable, equating to approximately $25 million in additional lost sales. Our supply chain teams are working closely with suppliers to make sure we are aligned on the demand signals and improve service level going forward.
We also delivered solid profit improvement versus the prior year period, with earnings diluted share of $0.60 for the first quarter, particularly in the light of the inventory, operational, and other expenses associated with meeting our customer needs against unplanned demand.
As we continue throughout our Fiscal 2018, we expect our growth to continue, driven by a demand for better products, more competition at retail, and enabling differentiated solutions. Consumers are shopping many different ways today. They want variety, specific attributes, exclusive brands, and pride in label and in brick-and-mortar retail. We play a role in all and add valuable merchandising, data insight, category management, to mutually pursue high-growth opportunities. Under the leadership of Kirsten Hogan, our new VP of Wellness and E-Commerce, we are focused on realizing the opportunities from our investments in technology and infrastructure necessary to fuel growth.
For the first quarter, e-commerce sales were up more than 30% and we see many opportunities ahead. We believe our distribution network and deep assortment of brands and products offer our customers and endless aisle of opportunity in our customer relationships.
I would like to reiterate our 2018 key strategic goals, all of which we focused on during the first quarter and these goals are the pillars that support our building out the store strategy. First, to win new customers and expand our relationships with existing customers. Second, expand deli meat and cheese categories into our broadline distribution network. Third, optimize our gross margin. Fourth, to grow our e-commerce space. And, finally, with our exceptionally strong balance sheet, maintain a robust M&A pipeline. We believe success in this strategy drives value for all our key constituents.
In summary, we've accomplished an incredible amount across our organization in a very short period of time. As our industry has and continues to evolve, our leadership team has consistently taken decisive steps to change with it so that UNFI remains well-positioned to meet the needs of our customers as we grow together. Consumer demand for the products we sell remain robust and we have a strong pipeline of exciting opportunities ahead. We believe our sourcing capabilities, our recent acquisitions, our very strong balance sheet and demonstrated leadership within better-for-you distribution will support our long-term growth and enable us to achieve our strategic objectives.
With that overview, I'll now turn the call over to Mike.
Michael Zechmeister -- Chief Financial Officer
Thanks, Steve, and good evening, everybody. Net sales for the first quarter of Fiscal 2018 increased 7.9% versus Q1 of last year or approximately $179 million to $2.46 billion. This was a company record for quarterly net sales, which resulted from broad-based growth across our significant channels.
As a reminder, our acquisition of Haddon House closed on May 13th of 2016, approximately two weeks into Q4 of Fiscal 2016 and the Gourmet Guru acquisition closed on August 10th of 2016, less than two weeks of Q1 of Fiscal 2017. As a result of the acquisition timing of Haddon House and Gourmet Guru, they did not have a meaningful impact on the comparability of our results in Q1 of this fiscal year versus Q1 of last fiscal year.
In Q1 of this fiscal year, we experienced modest inflation of approximately 19 basis points, which was relatively consistent with our inflation from the last quarter. And this marks the sixth consecutive quarter of either modest deflation or 0% inflation, which continues to be a headwind for our net sales and [audio interference]. From a channel perspective, supernatural net sales went up approximately $106.6 million or 14.3% over last year's first quarter and represented 34.7% of total net sales, compared to 32.8% in Q1 last year.
As Steve mentioned, demand for our products ramped up quickly and resulted in a higher-level growth than we expected in Q1. Supermarket channel net sales increased 4.7% in Q1, versus Q1 last year, and landed at 28.6% of total company net sales. Independent channel net sales grew 6.6% in Q1, versus Q1 last year, and represented 26% of total net sales in the quarter. Our food service net sales increased 1.2% over the first quarter last year. Our e-commerce sales increased 32.1% versus first quarter last year, representing our strongest quarter of year-over-year net sales growth since Q3 of Fiscal 2016. Gross margin for the quarter came in a 14.94%, a 38-basis-point decrease over last year's first quarter. The decrease was primarily due to a shift in customer mix where our sales growth with our lower margin customers outpaced growth with other customers and that was partially offset by an increase in fuel surcharge.
Our operating expenses in the first quarter were 12% in net sales, a 28-basis-point reduction, compared to the first quarter of last fiscal year. The year-over-year decrease was primarily driven by leveraging fixed costs on our increased net sales. This decrease was partially offset by increased costs incurred to fill the unexpected demands for our products, including overtime labor, outside storage, and transportation costs. We also experienced an increase in our healthcare costs in Q1, versus Q1 last year. Fuel costs for Q1 of Fiscal 2018 increased 1 basis point as a percent of distribution net sales, compared to the first quarter of Fiscal 2017 and represented 44 basis points distribution net sales.
Our diesel fuel cost per gallon increased approximately 7.2%, compared to the first quarter of last year, which compares to the Department of Energy's national average price per gallon for diesel in Q1, which increased 13.5% or $0.33 a gallon, compared to the first quarter of last year.
Our lower diesel fuel cost per gallon, compared to the national reported average was primarily due to unfavorable fuel locks in Fiscal 2017, which expired in Q2 of that year.
Compared to the fourth quarter of Fiscal 2017, our diesel fuel costs per gallon were up 11.4% or $0.26 a gallon. For the same period, the Department of Energy's average price per gallon for diesel was up 8%.
Share-based compensation expense represented 30 basis points of net sales in Q1, compared to 29 basis points in the first quarter of last year. On a dollar basis, share-based compensation expense was up 0.6 million to $7.3 million, compared to $6.7 million in Q1 last year. Q1 operating income was $55.1 million, an increase of $1.8 million from $53.3 million in Q1 last year.
Interest expense in Q1 of $3.7 million was $0.9 million lower than Q1 of last year, due to less debt year-over-year and partially offset by an 81-basis point increase in our floating rate exposure. At the end of Q1, we had fixed interest rates on approximately 79% of our debt, leaving approximately 21% of our debt with a floating rate exposure.
For the first quarter of Fiscal 2018, the company reported net income of $30.5 million, an increase of approximately $1.3 million over Q1 of last year. Q1 earnings per diluted share was $0.60, compared to $0.58 in Q1 of last year. During the first quarter of Fiscal 2018, the company adopted Accounted Standards Update 2016-09, Improvement to Employee Share-Based Payment Accounting. This new accounting standard negatively impacted the company's effective tax rate in the quarter by $0.9 million or a slightly less than $0.02 headwind to our earnings per diluted share in the quarter. Recorded as a discrete item, the impact of this adoption under rest of the year is expected to be minimal as the vast majority of our stock awards vest in Q1.
EBITDA for the first quarter was $77.5 million, an increase of 4% from $74.6 million in Q1 last year. EBITDA margin was 3.16% of net sales, down 11 basis points from Q1 of last year. Total working capital at the wend of Q1 was $1.2 billion, up 0.2%, versus Q1 of last year, compared to net sales growth of 7.9% over the same period. Our capital expenditures for the first quarter were approximately $5.3 million or 0.21% of net sales, a decrease from 0.40% of net sales in the first quarter of last year.
As a reminder, on October 6th, we announced that our board of directors authorized a share repurchase program for up to $200 million of our common stock. In the first quarter, we repurchased approximately 162,000 shares for $6.4 million or an average cost per share of $39.79. This represents a significant discount to our closing share price today. Due to the timing of the shares that we repurchased in the first quarter, the impact on the diluted EPS in the quarter was not meaningful.
We had a negative free cash flow of $77.3 million in the first quarter of Fiscal 2018, compared to a negative free cash flow of $16.5 million in the first quarter of last year. Q1 is typically our lowest quarter of free cash flow, driven by our increase in inventory in preparation for holiday demand. The impact this year was exaggerated by the unexpected increase in demand.
Our balance sheet continues to be strong. At the end of the first quarter, our debt-to-EBITDA leverage, excluding operating leases, was 1.42 times, which was down 57 basis points, compared to the first quarter of last year. At the end of Q1, the company's debt-to-EBITDA leverage was a full turn lower than our long-term expectations.
Outstanding lender commitments under our credit facility were $883 million, excluding reserves, with available liquidity of approximately $585 million, including cash and cash equivalents. At the end of Q1, our available liquidity was approximately $149 million higher than Q1 last year.
Based on UNFI's performance to-date and the outlook for the remainder of 2018, the company is increasing net sales and EPS guidance, which was previously provided on September 13th of 2017. For Fiscal 2018 ending July 28th, 2018, we now estimate net sales growth at 6.2% to 7.8% over Fiscal 2017 net sales or in the range of approximately $9.84 billion to $10.00 billion, compared to the previous estimate of $9.63 billion to $9.81 billion or growth of 3.5% to 5.8% over Fiscal 2017 net sales.
We now estimate our earnings per diluted share for Fiscal 2018 to be in the range of approximately $2.72 to $2.80, an increase of approximately 6.3% to 9.4% over Fiscal 2017 earnings per diluted share of $2.56. This represents a $0.04 increase at the mid-point, compared to the previous guidance of $2.67 to $2.77 per diluted share.
We are reducing our expectations for the Fiscal 2018 tax rate to be in the range of 40% to 40.3%, compared to previous guidance of 40.3% to 40.7%. This does not include any impact from tax reform under consideration in U.S. Congress.
Capital expenditures as a percentage of net sales remains unchanged at 0.6% to 0.7% of sales, as well as our estimated range of free cash flow at $155 million to $185 million.
At this point, I'll turn the call over to the operator to begin the question-and-answer session. Operator?
Questions and Answers:
Operator
At this time, we will be conducting a question-and-answer session. If you'd like to ask a question, please press *1 on your telephone keypad. A confirmation code will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the * key. One moment, please, while we poll for questions.
Our first question is from Rupesh Parikh, Oppenheimer & Company. Please proceed with your question.
Rupesh Parikh -- Oppenheimer & Company -- Senior Equity Research Analyst
Thanks for taking my question and congrats on a nice quarter. Maybe to start out, I guess, looking at the overall environment, we're clearly seeing trends pick up at all the natural organic publicly traded players at this point. I'm just curious, from your vantage point, what do you think is driving that pick up and how are you thinking about the sustainability?
Steve Spinner -- Chairman and Chief Executive Officer
Yeah, that's really the question of the day, isn't it? I think we've spent a lot of time thinking about that and we think the products are more desirable. We think that the retail price environment has become more competitive, and what that's doing, I think, is closing the gap -- the price gap -- between healthy and better-for-you and conventional, which is bringing more traffic into the stores. We've had long periods of very limited inflation and so you want to find a clear beneficiary in the short-term and, we believe, in the long-term as evidenced by the revision to our guidance. So, the other interesting comment is, when you look at our growth, overall, Mike talked about the disclosure around the supernatural but, if you look at our other top 24 customers, they also grew at 10% and so we're seeing lift across most of our customer channels, which is great news for us. I think that's our view of what's happening.
Rupesh Parikh -- Oppenheimer & Company -- Senior Equity Research Analyst
And, again, I'm not sure if you guys actually have the data, but any sense in terms of whether natural organic growth rates have increased across the industry?
Steve Spinner -- Chairman and Chief Executive Officer
Yeah, it's premature for that. We would probably get access to the data in, probably, the next two quarters or so -- it takes a long time to aggregate it -- but my guess is that we're going to see nice pickup there.
Rupesh Parikh -- Oppenheimer & Company -- Senior Equity Research Analyst
Okay, great. And then one more quick question: you commented on the increased SG&A expenses related to greater unexpected demand -- is there any way to quantify what, I guess, the expense lift was during the quarter... or impact on EPS?
Steve Spinner -- Chairman and Chief Executive Officer
We typically don't give that kind of disclosure. I can tell you, anecdotally, when you get the kind of dramatic increase that we had in demand, we are still focused on service -- in other words, making sure the customers have access to the products -- that we close our eyes to the fact that we're going to have to spend a lot of money in order to do it, whether it be moving product around the country using less efficient lanes to move the freight... Whenever you get that kind of increase -- it's just something that we had to do -- and we certainly had that in this quarter.
Michael Zechmeister -- Chief Financial Officer
Yeah, Rupesh, I would add to Steve's comments that, when the demand picks up unexpectedly, that's when we get put in a position where we're going to spend a little more on overtime, outside storage, and transportation, and the like. But, once we've got a sense for that over a longer period of time, then we certainly can handle that expense and the percent, itself, is a headwind. Now, we would expect that, certainly, by the back half of this year, we would be able to absorb this kind of demand flow without additional expense over our normal run-rate.
Rupesh Parikh -- Oppenheimer & Company -- Senior Equity Research Analyst
Okay, great. Thank you.
Operator
Our next question is from John Heinbockel, Guggenheim Securities. Please proceed with your question.
John Heinbockel -- Guggenheim Securities -- Managing Director
So, Steve, just following up on that, then I guess you have not yet been able to work the overtime and outside storage costs back down to a more normal level? That will still take a few more months?
Michael Zechmeister -- Chief Financial Officer
Yeah, so we will probably see that continue until after the holidays.
Steve Spinner -- Chairman and Chief Executive Officer
Yeah, I would say early Q3.
John Heinbockel -- Guggenheim Securities -- Managing Director
Okay. We talked about the issue of capacity utilization, the fact that you had a load dip there. Putting aside these one-time costs, are you seeing a benefit? Do you think you'll see a benefit as we get into the back half of the year from higher utilization or is that demand coming in the right places?
Sean Griffin -- Chief Operating Officer
Yeah, hey John, this is Sean. First of all, as it relates to capacity and utilization, we certainly have had discussions in FY '17 in this regard. So, yeah, we did not, obviously, discuss a plan for the revenue ramp-up from a timing perspective or the size of the ramp-up related to our present capacity model, so we're evaluating that here as we go. And we may make some changes to the model -- we'll see how that goes. But, in terms of expense and leverage in the distribution centers, we do expect, in the back half of the year, to begin to see the type of leverage off of our DC expense ratios that we historically would get with an increase in the topline so we feel good about where we can go from here.
Michael Zechmeister -- Chief Financial Officer
Yeah, I was just... So, important to note that we did not revise our CapEx for this year -- we're still comfortable with that -- and, once we get through the back half of the year and start looking at Fiscal '19 and '20, we'll give consideration to where we need to do some additions or new construction. But we're comfortable with the CapEx guides we've provided for '18.
John Heinbockel -- Guggenheim Securities -- Managing Director
Alright. And then, lastly, where are we, topline wise, on M&A and new customer wins? And, the whole Amazon/Whole Foods dynamic, did that kind of freeze things in terms of people making changes or no?
Michael Zechmeister -- Chief Financial Officer
No, not at all. Our pipeline for new customers is strong, our pipeline for M&A is strong, and, as I said previously, we swallowed four acquisitions within 18 months that took a lot of work and heavy lifting. A lot of people within the company did a lot -- spent a lot of time integrating them and we're really satisfied with where we ended. And so, we're really ready to get back onto the M&A trail -- we've got a balance sheet to support it -- and so I look forward to both the customer and the M&A pipeline delivering some nice results throughout Fiscal '18.
John Heinbockel -- Guggenheim Securities -- Managing Director
Okay. Thank you.
Operator
Our next question is from Andrew Wolf and Loop Capital Markets. Please proceed with your question.
Andrew Wolf -- Loop Capital Markets -- Managing Director
Yeah, thank you. So, on the vendor shortages, is there any commonality there? Was it more in grocery, versus the specialty/perishable side of things?
Sean Griffin -- Chief Operating Officer
This is Sean. I would say that, actually, the demand was so sudden that it affected a great many categories. Keep in mind, it's generally specialty suppliers we're talking about. So, we expect that to moderate -- we expect that suppliers and manufacturers will get their legs under them to meet this demand toward the Q2, Q3 time frame.
Yeah, an important note is the difference between our business which we call specialty and that's [audio interference] so, in our case, the majority of buyers are doing less than $30 million a year so, when you subject a smaller supplier to a great deal of increased demand, they don't have the ingredients, they don't have the copackers to produce it, and the vast majority of our suppliers do a just heroic job in trying to get the inventory to us that we need. There were some suppliers that had significant out-of-stocks during the holiday season, but they had the same issue that we did and that is a lot of increased demand really quickly. They just couldn't produce it fast enough.
Andrew Wolf -- Loop Capital Markets -- Managing Director
Okay. Good. Thank you. But there's enough gradients out there that, if the pipeline stays as strong as it is, eventually, they should be able to meet demand or close the gap?
Sean Griffin -- Chief Operating Officer
Without a doubt.
Andrew Wolf -- Loop Capital Markets -- Managing Director
Great. Okay. Now, on your sales beat, was that mainly from just more sales with existing customers, or was there a reasonable cohort of new customers that also helped out?
Sean Griffin -- Chief Operating Officer
It was a little bit of both. Yeah, and I would... target, as it relates to shipping to new customers that we've previously discussed.
Andrew Wolf -- Loop Capital Markets -- Managing Director
Okay, great. And, just a last thing as a follow-up on the expense side: recalling those healthcare costs, I assume that's not related, necessarily, to the surge in demand and the other costs but, nevertheless, is that something that is manageable, or is that just the randomness of healthcare or is it a trend? Are you going to have high healthcare costs for the year?
Sean Griffin -- Chief Operating Officer
We instituted a really, really terrific wellness program across the company about four or five years ago and made significant improvements to that plan every year to have a healthier workforce and educated workforce about how to apply our healthcare. And so, if you look at our healthcare costs over the last couple of years, they were really, really strong. And we're just in the quarter, in particular, we just had a handful of claims that brought our healthcare costs way higher than we thought they were going to be. Whether it continues or not, I don't know -- I'm hopeful that it doesn't -- but, in this particular quarter, they were significant.
Andrew Wolf -- Loop Capital Markets -- Managing Director
Got you. And did any of these excess costs that you've -- I understand you don't necessarily want to quantify them precisely -- but, nevertheless, were any of them impacting the gross margin rate or did any of that flow through cost of goods sold or did it all impact operating expenses?
Sean Griffin -- Chief Operating Officer
Well, when we talked about the increase over time, outside storage, transportation expense, medical expense, none of that was in gross margin. When you think about fuel costs, we have a geography difference that needs to be noted, which is when we have increased fuel costs -- which we've had -- we have a surcharge and the surcharge enhances gross margin, but then we pay for the extra fuel costs in our operating expense and so we get an increased margin, that gross margin, but then it comes back to us and nets help neutralize that net income.
Steve Spinner -- Chairman and Chief Executive Officer
One other comment I would take -- and then, Andy, we're probably going to take another call -- but, if you look back at our Fiscal '17, we did a great job managing our gross margin and, when you can properly plan for inventory, you have a much greater capacity to manage the gross margin on the inbound associated with that inventory. When you're scrambling to catch up and you're doing everything in your power to get inventory into the building, you're spending less time managing the gross margin than you should be and so that's just something that we have to get back to once we get stability in our overall growth.
Andrew Wolf -- Loop Capital Markets -- Managing Director
Yeah, OK. That's what I was getting at -- inbound. Right. Thanks. It's a great problem to have. Thanks.
Operator
Our next question is from Chuck Cerankosky with Northcoast Research. Please proceed with your question.
Chuck Cerankosky -- Northcoast Research -- Managing Director and Principal
Good evening, everyone. Great quarter. In looking at inflation still flattish -- or flat as the previous quarter -- are you saying the rate of inflation, perhaps, looking better for you? And I'm getting at opportunities for United to earn some inside margin.
Steve Spinner -- Chairman and Chief Executive Officer
Yeah, Chuck, we really enjoy inflation and we haven't seen it now for a year and a half, but there is a very modest trend within those six quarters that it is a little bit higher now than it was -- as you recall, we had some quarters of deflation in there, too. So, it's gotten a little bit better but, on a 10-year average, inflation rate is a little over 2.5% and that includes these past six quarter where we didn't have it. So, no guarantees of where it's going in the future but, if it were to head back to the historical average, that would certainly be a tailwind for us in net sales and EBITDA dollars.
Chuck Cerankosky -- Northcoast Research -- Managing Director and Principal
And then, back quickly, on the vendors -- so it's going to take them at least another quarter to catch up with the demand just because of their size?
Steve Spinner -- Chairman and Chief Executive Officer
Yeah, it's improving here, early Q2, but we expect it's going to take another couple of periods, yes.
Chuck Cerankosky -- Northcoast Research -- Managing Director and Principal
And then, finally, on the sales growth you saw in the quarter, how did that pace over the three months of the quarter? Was it uniform or accelerated through the quarter?
Steve Spinner -- Chairman and Chief Executive Officer
We've started to see some acceleration at the back end of the fourth quarter '17. We weren't exactly sure where the acceleration was coming from -- we were very happy to see it -- but we really didn't know if it was going to sustain so we've seen a continual ramp since then.
Chuck Cerankosky -- Northcoast Research -- Managing Director and Principal
Alright, thank you.
Operator
Our next question is from Shane Higgins with Deutsche Bank. Please proceed with your question.
Shane Higgins -- Deutsche Bank -- Vice President
Yes, thank you for taking the questions. So, you guys, it looks like e-commerce had a nice ramp-up during the quarter. Any color as to what was driving that and how that impacted your overall margins?
Steve Spinner -- Chairman and Chief Executive Officer
We don't give any disclosure on the margin. I can tell you that e-commerce is a very big focus for us, both in terms of the technology that we use to deploy an e-commerce solution as well as the rate of sales growth in all -- I don't know about all -- but most of our e-commerce providers, whether it be brick-and-mortar e-commerce or web-based e-commerce, we saw really, really strong growth across all of them. That's an area that's a very important strategic objective for us. We're doing a lot of work on the technology side. We're really focused on having an M&S style for our retailers so we can go directly to them or to their consumers to offer really extensive lines of all the products that we carry as well.
Shane Higgins -- Deutsche Bank -- Vice President
And do you guys have the capacity to continue to handle that level of growth -- that 30% plus kind of growth?
Steve Spinner -- Chairman and Chief Executive Officer
Yeah, fortunately, we've deployed e-commerce into, I guess, four of our DCs now and so I think we're well-poised to continue to see that kind of growth for some period of time. We now have that volume segregated into four different distribution centers as opposed to just the one.
Shane Higgins -- Deutsche Bank -- Vice President
Okay, great. And then, last one from me, on the hurricanes: was that a net benefit or was that fairly neutral to sales and to earnings during the quarter?
Steve Spinner -- Chairman and Chief Executive Officer
Yeah, we think of that as a net headwind to earnings. We definitely experienced some disruption and some of the expense associated with some of that disruption. We'll make a claim under insurance and get back some of that, but because of our deductible and other things, there were certainly some expense in the quarter and not a net benefit.
Shane Higgins -- Deutsche Bank -- Vice President
Okay. But it wasn't that material? You guys didn't call it out.
Steve Spinner -- Chairman and Chief Executive Officer
Right.
Shane Higgins -- Deutsche Bank -- Vice President
Okay, great. That's it for me. Thanks.
Operator
Our next question is from Ben Bienvenu with Stephens Inc. Please proceed with your question.
Ben Bienvenu -- Stephens Inc. -- Research Analyst
Yeah, thanks for taking my question. You called out, in the last quarter, competitive pricing as a pressure on growth margins, but not in this quarter. Would it be inaccurate to infer that competition is less? And, sequentially, any color you can offer there would be appreciated.
Steve Spinner -- Chairman and Chief Executive Officer
Yeah, Ben, we've called out competitive pricing pressure for quite a while, many quarters -- I can't tell you how many exactly but it's been quite a few -- and so that came out this quarter and your observation is accurate. And I think we were trying to point to the biggest drivers of our gross margin and our margin, overall, and, at this point, we just didn't feel like that made the list as one of the notable call-outs.
Ben Bienvenu -- Stephens Inc. -- Research Analyst
Fair enough. And the strong growth in supernatural is impressive. That was obviously a contributing factor to the makeshift and resulting lower margin pressure from lower margin customers. I think it would be incorrect to assume that this growth persists -- and makeshift persists -- but this wouldn't preclude you from leveraging operating margins, would it? Or, said another way, would you have leveraged operating margins excluding the ramp to fulfill the demand?
Steve Spinner -- Chairman and Chief Executive Officer
Yup, I think you are going down the right path.
Ben Bienvenu -- Stephens Inc. -- Research Analyst
Okay, great. And then just one last quick one: the $200 million share repurchase, you guys have a lot of free cash, not a lot of leverage -- that's not a signal that M&A isn't particularly imminent or is it more just you want to get this program in place, put capital to work now, and then you have the flexibility to turn that off when a deal heats up?
Steve Spinner -- Chairman and Chief Executive Officer
Yeah, Ben, we wanted to have share repurchase as a tool in our toolbox for capital structure management. To the extent that we have investments in capacity or in M&A that provide greater returns and we do believe we've got a pipeline for those, we prefer to use our balance sheet strength to return value to shareholders through investment. But, to the extent that we didn't have that teed up, then we believe that opportunistic share repurchase at the right price is a way to help ourselves out. And so, in the quarter, you saw we made some share repurchase at under $40.00 a share and we feel pretty good about that today.
Ben Bienvenu -- Stephens Inc. -- Research Analyst
Okay, great. Best of luck.
Operator
Our next question is from Chris Mandeville with Jefferies. Please proceed with your question.
Chris Mandeville -- Jefferies -- Equity Analyst
Hey, good afternoon, guys. Mike, I apologize -- my connection was quite poor earlier in the call -- but, just in terms of order of magnitude, what were the primary drivers to the gross margins erosion, aside from just the actual makeshift of the lower margin customer?
Michael Zechmeister -- Chief Financial Officer
Yeah, that's it. We only called out one and that was the customer mix shift. You heard Steve comment a little bit more about that and, certainly, you saw our disclosure in supernatural -- a 14% growth there -- but, if you look at our top 25 customers, or our top 24 customers excluding our No. 1 customer, that growth rate was 10%, also. So, you can surmise from that that we had real good growth there but, from a margins standpoint, that was a headwind on gross margins.
Chris Mandeville -- Jefferies -- Equity Analyst
Okay. And then color in terms of the benefit from the actual sale margin and maybe anything regarding that FX?
Michael Zechmeister -- Chief Financial Officer
Yeah, we didn't call out those, specifically. I can tell you that the fuel was in the neighborhood of 8 to 10 basis points on the gross margin from a tailwind standpoint, but then we give that back to the operating expense. From an FX standpoint, we're talking about the same level, roughly, from translation and transaction.
Chris Mandeville -- Jefferies -- Equity Analyst
Okay. Very helpful. And then, I apologize, but I'm still a little bit confused by the true surprise in the sales ramp at the back end of the quarter. Can you give us a little bit more context around what caught you off-guard?
Michael Zechmeister -- Chief Financial Officer
Yeah, obviously, we finished out our Fiscal '17, we budgeted for Fiscal '18 based upon what we knew in Fiscal '17, and then, toward the end of our fourth quarter, we started to see the sales starting to ramp up and we really weren't sure whether it was going to be a sustained ramp. And, as we got into the first couple of weeks and months in Fiscal '18, not only was it sustained, but it continued to grow.
And so, as you might imagine, in a distribution center, if you budgeted, for example, a 5% volume growth and, in a very short period of time, that 5% budget turns into 15% actual, we're just not prepared with the inventory, with the labor, with the workforce and so it puts a tremendous amount of stress on the organization in order to ensure that we have a high level of service. And so that's really what we're talking about.
Steve Spinner -- Chairman and Chief Executive Officer
Yeah, and just to add a couple more comments, if you look at our core growth -- so you look at the growth, X acquisition impact, X inflation -- we've seen our core growth increasing quarter-by-quarter for the last four or five quarters and so we've enjoyed that increase. As we set the guidance for this year at 3.8% to 5.8%, this year, we didn't have the impact of acquisitions as a tailwind, so we felt like that captured that core growth that we had seen previously. Now, obviously, we delivered a 7.9% without inflation and without the benefit of acquisitions, so that just, in numbers, shows you the rapid increase from expectation that we saw just on core growth.
Chris Mandeville -- Jefferies -- Equity Analyst
Okay. And then, just on the sales increase or the outside movement in the quarter, itself, with the lower margin customer, was that simply a factor of them driving more volume with what you've historically been servicing them with or is that somewhat of a result of you may be expanding and providing them with a greater subset?
Steve Spinner -- Chairman and Chief Executive Officer
I think, generally speaking, it's the former rather than later, it's just higher traffic into the stores, it's the effect of new customers coming on-board, it's expansion of existing contracts -- some category expansion inside -- but I think, generally speaking, it's just a general lift and improvement at the stores that we service and they're expanding at a higher velocity than the rest of the customer base. And there's a lot of consumer excitement out there in the products that we sell and the I think the attention in the space has really picked up and that's translated into higher volumes.
Chris Mandeville -- Jefferies -- Equity Analyst
Okay. And the last one from me here: just on the buy-back, itself, of about $6 million in the quarter -- had it not been for the incremental demand on working capital, would that have been greater in the quarter? I'm just curious as to why it was so small relative to the $200 million you have in sales?
Steve Spinner -- Chairman and Chief Executive Officer
Well, if you look at it, the approval of the program didn't start until October so we didn't have the benefit of a full quarter to be out there. And then, yeah, that's probably the primary reason.
Chris Mandeville -- Jefferies -- Equity Analyst
Alright. Thanks, guys.
Operator
Our next question is from Vincent Sinisi, Morgan Stanley. Please proceed with your question.
Vincent Sinisi -- Morgan Stanley -- Executive Director, Equity Research
So, just wanted to just, once again, go back to the sales dynamics and the balance with the margin, here. So, totally get it that the mix shift in the customers has the, obviously, nice effect on volume but the reverse on the margin, but maybe is it fair to say that, as you mentioned the competitor commentary coming out, is it status quo on the competitive front? And the top 24/25 customers that had that 10% growth or greater, is it fair to say that the smaller ones had similar growth? I guess the heart of that question is are you seeing a difference in growth rates between your larger, versus smaller customers? Just trying to get a sense for where the industry dynamics may have changed -- or not?
Steve Spinner -- Chairman and Chief Executive Officer
Yeah, I think that's a pretty good observation -- that the larger customers are growing faster than the smaller -- but we still had over 6% growth in our independents, which was a really respectable quarter. But I think, directionally, we certainly believe that the larger customers are growing faster.
Michael Zechmeister -- Chief Financial Officer
Yup. And I think that's a good point that Steve's making, that the growth with our largest customers did not come at the expense of our other customers and the fact that independents grew at 6.6%, that's a stronger growth rate than the quarter before and it's a testament to the popularity of the products across all of our most significant channels.
Vincent Sinisi -- Morgan Stanley -- Executive Director, Equity Research
Okay. Alright. Thank you. And, just a fast follow-up just to make sure that we understand, when you had mentioned earlier on with the ramp and sales of some of the outside storage expenses, was that more of a case -- and maybe it varied by geography -- but was it more of a case that the timing just didn't allow for it to normally come to the DCs as you would have planned if you had more advanced planning? Or was it more of a case where, in some areas, you just did not have the capacity physically? How should we think about that?
Steve Spinner -- Chairman and Chief Executive Officer
Yeah, it certainly is geography -- certain distribution centers have challenges, versus others that continue to have some upside capacity -- but the long and the short of it is, as we've described a couple of times, is that, typically, to digest and execute against the volume ramp-up that we saw in Q1, that we would have several months to prepare.
And, if that included adding expansion into a distribution center or contiguous space in a distribution center, we certainly would have done that. In this sense, we were not afforded that planning and prep opportunity so we did the best we could. And that irons out and levels out and, from an execution perspective, we'll gain better leverage as the year goes by.
Vincent Sinisi -- Morgan Stanley -- Executive Director, Equity Research
Got it. Okay. Very helpful. Thanks very much. Good luck.
Operator
Our next question is from Scott Mushkin with Wolfe Research. Please proceed with your question.
Scott Mushkin -- Wolfe Research -- Managing Director
Hey, guys. Thanks for taking my questions. Hopefully, you can hear me -- I'm on a cell and I apologize for that. But one clarification: the top 24, the independents, none of the top 24 clients in that bucket -- the independents bucket? I thought there were some, but maybe I'm mistaken there.
Steve Spinner -- Chairman and Chief Executive Officer
If you're talking about true independents -- singular customers -- they are not reflected in the top 24, obviously, but in the top 24 are some significant customers that are aggregated as a singular entity that are national in scope and have significant scale. Customers that we would consider are natural multi-unit operative.
Michael Zechmeister -- Chief Financial Officer
Yeah.
Scott Mushkin -- Wolfe Research -- Managing Director
But they're not in that independent bucket you guys give us?
Steve Spinner -- Chairman and Chief Executive Officer
No, they're not.
Scott Mushkin -- Wolfe Research -- Managing Director
Okay.
Steve Spinner -- Chairman and Chief Executive Officer
Now that I think about it, that's not true. Some of them are in the independent channel.
Scott Mushkin -- Wolfe Research -- Managing Director
Oh, OK. I just wanted to make sure. I thought so and I just wanted to make sure. The second question I had is what kind of [audio interference] Amazon buys Whole Foods, both cut price while Amazon goes through the roof. They're cutting price again and they're getting some out-of-stock issues there and I don't think you're really at fault -- I think it's just the buy-in's gone through the roof -- so, if they continue to do that, how well are you guys prepared to deal with this? It's a great problem to have, but it's a problem we're seeing in more stores and, again, they're being very aggressive [audio interfering] so how [audio interference] are you guys to deal with it and it is possible you might have to pull forward to expense or other things to deal with this? Because my expectation would be they continue to operate this way -- this challenge is likely to persist.
Steve Spinner -- Chairman and Chief Executive Officer
Yeah, listen, we, obviously, wouldn't comment on any one customer or channel. We've had periods in our history where we see volume ramping, either as a result of a new customer or inflation. And so we're used to having some lumpy growth in our history and we know how to deal with it and so, regardless of the cause, our goal is to provide the finest level of service across our entire customer base and we have the most built-out distribution network, we have the most sophisticated supply chain network throughout North America, we know how to buy the product, we know how to move it around the country, and we know how to deliver a very high level of service, and that's really our function -- that's what we do.
And, when we get bumps like the one that we're in or challenges as a result of a hurricane, we get a little bit of a short-term pain in our neck, but we know how to deal with it. We've got an incredible workforce that is very focused on execution and we'll work our way through it, like we always do.
Scott Mushkin -- Wolfe Research -- Managing Director
Okay. And my last question for you guys is regarding the tax cuts and the potential of the tax cuts. The Home Depot Analyst Day yesterday and the question came up, "What do you expect your vendors to do when they get the cuts?" and they said, "Well, we expect them to reduce their pricing and share." So, can you, maybe, walk us through how you guys are thinking about the tax cuts, vis a vis, some of your big retail partners and how that may play out? That'd be wonderful and thank you for taking my question.
Steve Spinner -- Chairman and Chief Executive Officer
Yeah, thanks, Scott. I can't speak for what the tax reform may do to customers or suppliers, but I'll tell you how we're thinking about it. And, just as a disclaimer, until the contemplate tax reform is signed into law, we can't provide any assurances on the impact on UNFI. That said, we're evaluating all aspects of the tax reform that have been made public and we see the potential for significant reductions to our effective tax rate as a result and that would, certainly, lead to a meaningful increase to net income, free cash flow, and EPS.
Now, if you assume, for example, that the 20% corporate tax rate does happen, then we would expect to see a $25 million to $35 million cash benefit and an additional book tax benefit that would be $25 million or more. Now, the timing of the impact is certainly subject to when the bill gets signed and when the various changes go into effect and what, if any, changes occur in the state tax rates where we do business, as well. But, overall, we see it as quite a bit of a positive. Now, again, we're not able to comment on what might happen with suppliers or customers in terms of the impact that it has on them.
Operator
Our next question is from Chris Krikel, Goldman Sachs. Please proceed with your question.
Chris Krikel -- Goldman Sachs
Hey, guys, thanks for taking the questions. Just a few follow-ups on the sales growth. Are there specific categories that you saw large increases? And, given the cadence that you described, is it fair to assume the strength has, A.), continued into the second quarter and you're probably running above where you reported for the first quarter? And then just an accounting question: are any online sales done by your supernatural customer reflected in that line item or is that reflected in the e-commerce number you reported?
Steve Spinner -- Chairman and Chief Executive Officer
Well, so the last question is all of our e-commerce sales are reflected in e-commerce because our sales are calculated by the channel in which we handle the distribution, not the customer. No. 2, on the categories side, I would respond that we generally do not speak and communicate in terms of the category growth or the channel growth but, in looking at it, I would say it's broad-based. I think there was a third in there -- I just don't remember what it is?
Chris Krikel -- Goldman Sachs
Yeah, I was just trying to gather, from the cadence of sales growth that you described, from 4Q to today, is it fair to assume that that strength, I guess, has continued into the second quarter and, probably, you're running above what you just printed for the first quarter?
Steve Spinner -- Chairman and Chief Executive Officer
Yeah, so, obviously, we don't give quarterly guidance -- we just revised our guidance upward for the year so that's the number that we're comfortable disclosing.
Chris Krikel -- Goldman Sachs
Okay, makes sense. And then just one last one on CapEx: what does a scenario look like where your CapEx needs to go back up and would it be closer to that 1% of revenue number or would you have to go higher?
Steve Spinner -- Chairman and Chief Executive Officer
Yeah, Chris, what we've said is that our long-term guidance on CapEx is 1% of sales. Now, what you've seen here over the past few years is certainly lighter than that, but that's because we haven't put on new warehouses or expansions onto existing warehouses. If you go back in our history and you look at the years where we opened the new warehouses, you'll see that that CapEx as a percent of sales pops up. So, as we contemplate capacity expansion -- and, again, we've affirmed our guidance for this year, so we don't see that happening in this year -- but, as we go forward, if we have to put the CapEx in, it's likely to go above that historical average.
Chris Krikel -- Goldman Sachs
Great. Thanks for taking the questions and good luck over the holidays.
Operator
Ladies and gentlemen, we have reached the end of the question-and-answer session and I would like to turn the call back to Steve for closing remarks.
Steve Spinner -- Chairman and Chief Executive Officer
Yeah, thanks, everybody, for joining us this evening. I know there's a couple of people that were in the queue that we didn't go to -- we just ran out of time -- and we're happy to have one-on-one conversations with you. Have a safe and healthy holiday season and we'll talk to you next year.
Operator
This concludes today's conference. You may disconnect your lines at this time. Thanks for your participation.
Duration: 59 minutes
Call participants:
Katie Turner -- Investor Relations
Steve Spinner -- Chairman and Chief Executive Officer
Michael Zechmeister -- Chief Financial Officer
Sean Griffin -- Chief Operating Officer
Rupesh Parikh -- Oppenheimer & Company -- Senior Equity Research Analyst
John Heinbockel -- Guggenheim Securities -- Managing Director
Andrew Wolf -- Loop Capital Markets -- Managing Director
Chuck Cerankosky -- Northcoast Research -- Managing Director and Principal
Shane Higgins -- Deutsche Bank -- Vice President
Ben Bienvenu -- Stephens Inc. -- Research Analyst
Chris Mandeville -- Jefferies -- Equity Analyst
Vincent Sinisi -- Morgan Stanley -- Executive Director, Equity Research
Scott Mushkin -- Wolfe Research -- Managing Director
Chris Krikel -- Goldman Sachs
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