What: Shares of natural foods distributor United Natural Foods (NASDAQ:UNFI) slumped on Tuesday after the company disclosed that it had lost a major contract with Albertsons. At 10:45 a.m., the stock was down nearly 14%.
So what: United Natural Foods' contract with Albertsons was originally set to end on July 31, 2016, but Albertsons has opted to terminate the contract early, on Sept. 20, 2015. This move ends the relationship between United Natural Foods and Albertsons.
United Natural Foods' fiscal year, which ends on Aug. 1, will be unaffected by this news. However, the company expects to take a one-time charge related to severance and termination costs during the first quarter of fiscal 2016. The Albertsons relationship is expected to contribute about $410 million of revenue during the current fiscal year, or roughly 5% of the company's guidance for fiscal 2015 revenue. This revenue will disappear once the Albertsons contract ends.
Now what: CEO Steve Spinner had this to say: "We are disappointed to end our existing relationship with Albertsons. However, we believe that this course of action is in the best long-term interests of United Natural Foods as it will now allow us to redirect our resources to pursue our previously announced plans to expand our focus in fresh categories such as proteins and specialty cheeses across the country, grow our gourmet and ethnic business, and serve as an e-commerce solution for our customers. We plan to utilize the capital freed up from the termination of our Albertsons' relationship to further pursue our strategic objectives, and we believe this will provide greater value for our shareholders long-term."
United Natural Foods is growing quickly enough that this hit in revenue, while significant, will likely be just a bump in the road. The market's reaction to the news, sending the stock down 14% on a 5% reduction in revenue, seems like an overreaction to me.
Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.