A month has gone by since the last earnings report for United Natural Foods (UNFI). Shares have lost about 6.4% 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 the most recent earnings report in order to get a better handle on the important drivers.
United Natural Beats on Q2 Earnings, Sales Up Y/Y
United Natural released second-quarter fiscal 2019 results, with earnings and sales beating the Zacks Consensus Estimate. Also, the top line improved year on year. Further, the company updated the view for fiscal 2019.
However, we note that bottom line fell year on year due to lower operating income and high interest expenses. Higher expenses associated with the acquisition of SUPERVALU dented performance in the reported quarter.
United Natural’s earnings of 44 cents per share surpassed the Zacks Consensus Estimate of 23 cents, but declined as much as 38% on a year-over-year basis. The bottom line in the quarter was impacted by rise in interest expenses and lower operating income.
Net sales amounted to 6,149.2 million, depicting a radical increase of almost $3,621.1 million from the year-ago quarter’s tally. Also, the top line exceeded the Zacks Consensus Estimate of $5,995 million. SUPERVALU contributed nearly $3.47 billion to sales, which was a major upside. The Supernatural and Independents channels also continued to perform well. Consistent strength in product demand fueled performance in the quarter. Further, legacy sales increased nearly 5.8%.
Meanwhile, the company’s adjusted gross margin contracted 217 basis points (bps) to 12.5% due to unfavorable shift in consumer mix as well as the inclusion of SUPERVALU, which contributed at a reduced gross profit rate. Declines in legacy SUPERVALU distribution centers also impacted the metric.
Further, adjusted operating income fell almost 64% to $18.5 million due to gross margin contraction and increased operating expenses. Nevertheless, adjusted EBITDA went up almost 79% to $143 million in the said quarter.
From a channel point of view, supernatural net sales surged 18.2% year over year, contributing 36.8% to total net sales in the second quarter.
Supermarket channel net sales rose substantially and contributed 63.5% to net sales. Excluding SUPERVALU, the segment’s legacy sales declined nearly 1.4%.
Sales in the independent channel rallied 25.3% and contributed 13.2% to net sales. Excluding SUPERVALU’s impact, net sales in this unit improved 4.6%.
In the other channel, net sales improved 44% and contributed 5.5% to United Natural’s top line. On a legacy basis, the unit’s sales deteriorated 17.4%, thanks to a soft e-commerce platform.
Other Financial Updates
The company ended the quarter with cash and cash equivalents of $49.5 million, long-term debt of nearly $2,965.3 million and total shareholders’ equity of approximately $1,483.4 million.
In the reported quarter, net cash provided by operating activities was roughly $25.9 million. Capital expenditures were approximately $80.1 million during the second quarter.
Fiscal 2019 Guidance
Management highlighted that the company is progressing well with the integration of SUPERVALU. Although the company is currently experiencing higher costs related to SUPERVALU, it is focusing on making improvements and expects such headwinds to subside in the forthcoming periods.
That said, the company updated fiscal 2019 guidance. Net sales continue to be projected in the band of $21.5-$22 billion. Adjusted earnings are anticipated to be $2-$2.40 per share compared with the earlier view of $1.69-$1.89. The Zacks Consensus Estimate is currently pegged lower at $1.73. On a GAAP basis, the company envisions loss in the range of $6.10-$6.50.
Further, adjusted EBITDA is expected in the range of $580-$610 million, down from the previous view of $650-$665 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
At this time, United Natural has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. Following the exact same course, 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. Notably, 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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