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It has been about a month since the last earnings report for United Natural Foods (UNFI). Shares have added about 3.1% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is United Natural due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
United Natural’s Q3 Earnings Beat Estimate, Sales Down Y/Y
United Natural delivered gloomy results for third-quarter fiscal 2021. The top and the bottom line declined on a year-over-year basis. Additionally, net sales missed the Zacks Consensus Estimate. To top it, management stated that it now expects to end fiscal 2021 net sales toward the lower end of its previously-offered view.
Quarter in Detail
United Natural’s adjusted earnings of 94 cents per share beat the Zacks Consensus Estimate by a penny. However, the bottom line declined 29.3% from $1.33 per share reported in the year-ago quarter. The year-over-year decline can be attributed to lower net sales and drab adjusted operating income.
Net sales from continuing operations came in at $6,620 million, which lagged the Zacks Consensus Estimate of $6,825.3 million. Moreover, net sales declined 5.9% year over year. Notably, the year-ago quarter’s sales figure reflects gains from solid initial consumer demand as the coronavirus broke. On a two-year stack basis, net sales increased 6.7%. Management believes the metric to be appropriate for comparison given the unprecedented activity in the year-ago quarter.
The company’s gross margin rate came in at 14.6% as a percentage of net sales, down from 14.9% reported in the year-ago quarter. The downside was caused by reduced supplier-related income in the Wholesale segment. Moreover, retail gross margin rate were unchanged year over year.
Adjusted operating income came in at $100.4 million in the quarter, down from $138.9 million reported in the year-ago quarter. Adjusted operating income, as a percentage of net sales, fell from 1.97% to 1.52%. The downside was due to reduced gross margin rate and deleverage of lower sales. These were somewhat countered by reduced pandemic-induced expenses and decline in incentive compensation costs. Adjusted EBITDA came in at $179.5 million, down from $222.2 million posted in the year-ago quarter. The downside was mainly due to same factors that affected operating income in the quarter.
Net sales in Supernatural inched up 0.6% year over year to $1,287 million. On a two-year stack basis, the metric rallied 16.6%. Management highlighted that its recently signed long-term agreement with a key customer is an upside. The company is committed toward supporting the customer as they inaugurate new locations as well as enhance operational efficiencies and customer experience.
Net sales in the Chains channel fell 5.6% to $2,949 million. On a two-year stack basis, the metric improved 5.4%. The company is encouraged by year-over-year improvement from cross-selling wins with many key chain customers.
Net Sales in the Independent retailers channel came in at $1,599 million, down 11.4% year over year. On a two-year stack basis, the metric increased 3.8%. In the Retail channel, net sales declined 9.3% to $578 million. On a two-year stack basis, the metric jumped 14.9%. Other sales came in at $580 million, down 3.2%.
The company ended the quarter with cash and cash equivalents of $39.5 million, long-term debt of $2,314.2 million and total shareholders’ equity of $1,301.1 million. Total debt (net of cash) in the fiscal third quarter came in at $2.4 billion, down $62 million from the preceding quarter. This decline was caused by $129 million in cash provided by operations in fiscal third quarter, including gains from reduced net working capital somewhat offset by capital expenditures. The net debt to adjusted EBITDA leverage ratio improved slightly to 3.3x as of third-quarter-end.
Fiscal 2021 Guidance
Although the company’s top line has moderated from the year-ago period’s spike, operational efficiencies and the ValuePath productivity initiative keep it well-positioned to deliver fiscal 2021 adjusted EBITDA and adjusted EPS at the upper end of the previous guidance. The company expects to deliver net sales at the low end of the guidance range on extended timing of onboarding new business wins.
Management anticipates fiscal 2021 net sales at the lower end of $27-$27.8 billion. This suggests 3.3% growth over fiscal 2020 at the midpoint. United Natural expects adjusted EBITDA toward the upper end of the previous guidance of $690-$730 million that indicates a 5.5% rise over fiscal 2020 at the midpoint. Also, it envisions adjusted earnings at the higher end of its earlier guidance of $3.05-$3.55 per share, which indicates an increase of 21.3% from fiscal 2020 levels at the midpoint. The company still expects fiscal 2021 capital expenditure in the range of $250-$300 million and approximately $250 million of net debt reduction.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -5.8% due to these changes.
Currently, United Natural has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise United Natural has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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