United Natural Beats on Q2 Earnings; Lags Sales; Shares Up
Shares of specialty foods distributor United Natural Foods, Inc. UNFI increased 4.92% in after-hours trading on Mar 7, after the company posted better-than-expected earnings in the second quarter of fiscal 2016. United Natural reiterated its outlook for fiscal 2016.
This Providence, RI-based company reported second quarter adjusted earnings of 49 cents per share. Earnings beat the Zacks Consensus Estimate of 48 cents by 2.1% but declined 24.6% from the prior-year quarter earnings of 65 cents due to lower gross and operating income margins.
United Natural Foods Inc. - Earnings Surprise | FindTheBest
Revenue and Margin Details
Net sales of $2.05 billion came in line with the Zacks Consensus Estimate and increased 1.5% from the prior-year quarter. Net sales in the current quarter include the impact of the previously disclosed termination of a customer distribution contract and in the prior quarter, net sales included the previously disclosed non-recurring reduction in net sales. Excluding these items, adjusted net sales increased 6.8% in the quarter. The e-commerce business remained solid and grew almost 26% over the prior year quarter.
Despite a year-over-year increase in revenues, gross margin declined 31 basis points (bps) to 14.5% in the reported quarter. Excluding the impact of the previously disclosed $7.7 million in non-recurring reductions in second quarter 2015 net sales, gross margin declined 63 basis points. This was due to unfavorable customer mix, moderated supplier promotional activity, lower fuel surcharges, competitive pricing pressure and currency headwinds. The company continues to expect currency and reduction in fuel surcharge to have an unfavorable impact year-over-year on gross margin.
Adjusted operating margin decreased 65 bps to 2.18% due to lower gross margin and higher operating expenses.
Acquisition Update
Along with the earnings release, the company, through its wholly owned subsidiary Albert's Organics, Inc., announced that it has acquired certain assets of Global Organic, which is a premier distributor of organic fruits, vegetables, juices, milk, eggs, nuts, and coffee in the Southeast. Global Organic's operations will now be combined with the company's existing Albert's business in the Southeast.
Last week, United Natural had agreed to buy Haddon House Food Products, which is a distributor and merchandiser of natural and organic and gourmet ethnic products throughout the Eastern United States. This transaction will provide the company with greater operating scale and resources to further develop its product and service offering.
Fiscal 2016 Guidance Reaffirmed
United Natural reiterated its fiscal 2016 guidance, as was announced in preliminary results released on Mar 1. For fiscal 2016, the company expects net sales in the range of approximately $8.31 billion to $8.43 billion, an increase of approximately 1.5% to 3% over fiscal 2015. The guidance is lower than the previously disclosed guidance of $8.43 billion to $8.59 billion, announced on the first quarter conference call. Adjusted earnings for fiscal 2016 are estimated in the range of $2.34 to $2.44, compared with fiscal 2015 adjusted earnings per diluted share of $2.85. The Zacks Consensus Estimate of $2.37 is within the range. However, the new guidance is lower than the previously guided range of $2.79 to $2.89 per share. In fact, this is the second downward revision in its fiscal 2016 guidance this year.
Though encouraged by consumers’ increasing demand for organic products, driven by a healthy lifestyle, food safety and environmental sustainability, we cannot ignore the fact that the company has been struggling from continued weakness in gross margins over the past few quarters. This is due to a shift in customer mix to the lower-margin supermarkets channel. The company’s recent acquisitions, though adding to top-line growth, put pressure on margins. Unfavorable currency is an added woe.
United Natural has a Zacks Rank #4 (Sell). Some better-ranked food companies include Campbell Soup Company CPB, Pinnacle Foods, Inc. PF and Post Holdings, Inc. POST. While Campbell sports a Zacks Rank #1 (Strong Buy), Pinnacle Foods and Post Holdings hold a Zacks Rank #2 (Buy).
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