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United Natural Foods Delivers Core Growth in the Third Quarter

By Asit Sharma - Jun 6, 2019 at 12:10PM

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The dust is settling on the company's mega-acquisition of SUPERVALU, and its overall outlook appears to be stabilizing.

Food wholesale distributor and grocery retailer United Natural Foods (UNFI 2.67%) reported fiscal third-quarter 2019 earnings results on Wednesday after the close of trading. After a fiscal second quarter in which the organization encountered earnings issues immediately following its October 2018 acquisition of conventional grocery wholesaler SUPERVALU, UNFI achieved a healthier result over the last three months. Note that in the discussion that follows, all comparable numbers refer to the prior-year quarter.

United Natural Foods: The raw numbers

Metric Q3 2019 Q3 2018 Change (YOY)
Revenue $6.0 billion $2.6 billion 130.7%
Net income  $57.1 million $51.9 million 10%
Diluted EPS $1.12 $1.02 9.8%

Data source: United Natural Foods. YOY = year over year. EPS = earnings per share. 

Organic packaged produce in a grocery aisle.

Image source: Getty Images.

What happened with United Natural Foods this quarter?

  • Of the company's $3.4 billion revenue increase, $3.24 billion was contributed by SUPERVALU.
  • UNFI achieved 2.8% organic growth as its "supernatural" business (sales to natural and organic food retailers) expanded by 11% to $1.1 billion. Thus, core legacy revenue experienced credible growth.
  • As I discussed last quarter, UNFI had previously recorded a $370.9 million noncash impairment charge to SUPERVALU's goodwill, based on a change in SUPERVALU's trading value following execution issues that caused the company's earnings contribution to UNFI to decline immediately after the acquisition. This quarter, UNFI recorded a goodwill and asset impairment benefit of $38.3 million, essentially adjusting the initial estimate and somewhat reducing its impact.
  • UNFI's gross margin decreased by approximately 220 basis points to 13.22%, mainly from the addition of the lower-margin SUPERVALU business to the company's books.
  • Profit margins may be lower, but the SUPERVALU purchase has boosted the sheer dollar amount of UNFI's earnings. Adjusted EBITDA jumped by 50.2% to $168.2 million during the quarter, propelled by SUPERVALU's contribution to earnings. 
  • The company reaffirmed that it will achieve $36 million in cost synergies from the SUPERVALU merger in the current fiscal year, and stated that it's on track to hit $185 million in cost synergies by the end of fiscal 2022.

What management had to say

In United Natural Foods' earnings conference call, CEO Steve Spinner addressed a topic that's top-of-mind for shareholders of companies reporting earnings this month -- namely, the impact of current and potential import tariffs imposed by the Trump administration on goods entering the U.S. Essentially, Spinner signaled that UNFI doesn't expect a material impact from tariff activity:

[P]art of this environment that's captured recent headlines is the issue of tariffs, and more specifically those that could be levied on goods from Mexico, which would mainly be produce, where we have small exposure. In the short term, we'd expect these tariffs to be a form of cost increase that would get passed through to customers and most likely the end consumers.

China is another country facing higher tariffs on goods exported to the United States. We have very, very little exposure to the products on the most recent tariff list, which are mainly in seasonal categories. Combined, our inventories associated with China and Mexico are less than 50 basis points of total inventory.

Looking forward

Last quarter, due to the massive goodwill impairment charge, United Natural Foods lowered its full-year EPS estimate from a band of -$0.19 to $0.01 to a significant expected loss ranging from -$6.50 to -$6.10. Alongside Wednesday's earnings release, the company revised the per-share loss estimate to between -$5.85 and -$5.65. This reflects the goodwill benefit recorded this quarter, as well as management's confidence that execution issues at SUPERVALU have improved. Shareholders will undoubtedly look for significant earnings improvement from the combined entity in the coming fiscal year.

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