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A month has gone by since the last earnings report for United Natural Foods (UNFI). Shares have lost about 3.5% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is United Natural due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
United Natural Q2 Earnings Beat Estimates, Sales Jump Y/Y
United Natural delivered robust results for the second quarter of fiscal 2021. Adjusted earnings of $1.25 per share cruised past the Zacks Consensus Estimate of 92 cents and rose significantly from 25 cents reported in the year-ago period. The year-over-year surge can be attributed to greater net sales and an improved operating income.
Net sales from continuing operations came in at $6,888 million, which lagged the Zacks Consensus Estimate of $6,910 million. Nonetheless, net sales advanced 7.1% year over year, marking an increase of 110 basis points from a 6% rise in the first quarter. Sales growth was backed by robust customer demand from existing as well as new retailers, including continued gains of cross-selling. However, the upside was somewhat negated by the impact of previously lost stores, which include shutdowns related to three customer bankruptcies before the pandemic.
Markedly, cross-selling initiatives generated additional sales worth nearly $90 million in the second quarter and United Natural expects to generate cumulative cross-selling revenues of $1 billion by the end of fiscal 2022. part from these, its sales are benefiting from e-commerce strength, thanks to increased e-commerce solutions offered by the company. E-commerce sales surged a whopping 97% in the quarter, on the back of new business as well as higher sales to the company’s biggest e-commerce customer.
Meanwhile, gross margin came in at 14.38%, higher than 14.26% reported in the year-ago quarter. The upside was driven by contributions of nearly 0.13% from the Retail business, which in turn stemmed from reduced promotional expenditure as well as Retail forming a bigger proportion of net sales. Gross margin at the Wholesale and the remaining businesses was nearly flat year over year as gains from reduced shrink were countered by reduced supply-related income.
Adjusted operating income came in at $123.1 million in the quarter, up from $54.1 million reported in the year-ago quarter. Adjusted operating margin increased from 0.84% to 1.79%, courtesy of higher net sales, increased gross margin, reduced benefit costs and fixed operating expense leverage on increased sales. Moreover, adjusted EBITDA jumped 57.4% to $206.3 million.
From a channel point of view, Supernatural net sales increased 7.2% year over year to $1,298 million. Net sales from the Chains channel rose 6.5% to $3,097 million. Sales in the Independent retailers channel came in at $1,701 million, up 9% year over year. In the Retail channel, net sales increased 15.2% to $621 million. Other sales came in at $568 million, up 0.4%.
Other Updates & Outlook
The company ended the quarter with cash and cash equivalents of $40.5 million, long-term debt of $2,374.3 million and total shareholders’ equity of $1,229.1 million. Further, the company’s total debt (net of cash) was $2.49 billion as of the end of the second quarter, representing a decline of $242 million from the preceding quarter. The decline in debt level can be attributable to cash from operations of $265 million recorded in the second quarter of fiscal 2021. The company’s net debt to adjusted EBITDA leverage ratio improved to 3.2x as of the second-quarter-end.
The company expects food-at-home consumption to stay high in fiscal 2021. Further, it expects at-home consumption to outpace away-from-home consumption in the remaining parts of fiscal 2021. Incidentally, work-from-home trends are likely to stay for a while. Also, a number of Americans are focused on managing their household budget efficiently, as part of which they opt for reasonable options like dining at home. Apart from these, increased demand for better food options with ingredient transparency works well for United Natural.
Certainly, United Natural remains committed to optimizing distribution networks, creating increased operating benefits to its Value Path initiative, curtailing the cost structure and making technology-related investments. Also, management remains encouraged about its recently extended deal with its biggest customer — Whole Foods Market. Per the deal, the term of the primary distribution agreement between United Natural and Whole Foods is now extended till Sep 27, 2027.
Management reiterated its fiscal 2021 view, though it now expects adjusted EPS and adjusted EBITDA to come in at the upper end of the previously guided view. However, the company’s third-quarter fiscal 2021 sales, adjusted EBITDA and adjusted EPS are likely to be lower than the year-ago period, which gained from an unexpected surge in pandemic-induced demand. Nevertheless, management is confident about its full-year view.
Management anticipates fiscal 2021 net sales 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 previously guided range of $690-$730 million that indicates a 5.5% rise over fiscal 2020 at the midpoint. Also, it envisions adjusted earnings to come in at the higher end of its earlier guided band 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 a net debt reduction of about $250 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 5.94% due to these changes.
At this time, United Natural has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top quintile 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 upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise United Natural has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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