The company has driven growth through acquisitions, and recently acquired conventional food wholesaler SUPERVALU. However, margins have suffered due to reater-than-expected SUPERVALU acquisition and integration costs, and lower margins on SUPERVALU sales. Prior to the pandemic, increased competition and pressure from slow new store growth, higher labor and freight costs, and supply-chain issues also weighed on the company’s performance. However, the company has benefited from increased sales during the pandemic (with consumers stocking up on food and eating more meals at home), as well as from renegotiated supplier agreements and the expansion of its distribution center network. Trends in the company’s ‘better-for-you’ products, its higher-margin private brands business, and its value-priced Brands+ portfolio also remain favorable. Additionally, e-commerce sales have grown.
On December 9, UNFI reported fiscal 1Q21 results. Sales came to $6.67 billion. The growth in first-quarter sales reflected elevated volume, driven both by increased wallet share from its existing customer base and from new business. Sales were strong in the Supernatural channel, which grew 9.3%, the Chains channel, up 5.0%, Independent retailers, up 7.4% and in Retail, up 15.5%.
Adjusted earnings totaled $0.51 per share, up from $0.04 a year earlier but $0.23 below consensus.
The 1Q gross margin expanded slightly by 7 basis points to 14.5%, as retail sales outpaced wholesale and promotional expenses declined.
Along with the 1Q results, management provided FY21 guidance. It reaffirmed its expectation for revenue of $27.0-$27.8 billion, adjusted EPS of $3.05-$3.55 and adjusted EBITDA of $690-$730 million. It revised its expectation for capital expenditures to $250-$300 million, from $200-$250 million previously. The guidance assumes continued higher at-home food consumption, lower retail promotional spending, and fewer new product introductions.
On September 28, the company announced that CEO Steven L. Spinner would retire on July 31, 2021, or as soon as a successor is found. Mr. Spinner will remain on the board as executive chairman.
On October 22, 2018, UNFI completed its $2.9 billion acquisition of SUPERVALU Inc. Management expects the acquisition to generate $175 million in cost synergies by year three and $185 million by year four, driven by overhead optimization and operational efficiencies. The acquisition expands UNFI’s product range and its customer and supplier base. Its top customer (Whole Foods) now represents about 17% of combined company sales, down from 37% in FY18.
In October 2020, the company announced it signed a 10-year agreement with Key Food Stores Co-Operative to serve as their primary grocery wholesaler. UNFI expects net sales of about $1 billion annually.
EARNINGS & GROWTH ANALYSIS
UNFI has recategorized its sales channels based primarily on customer size (as defined by store count), rather than on the type of products carried (e.g., natural foods versus conventional foods).
Sales in the Supernatural channel grew 9.3% in fiscal 1Q and represented 18% of total net sales. Comp sales in the channel have grown since Amazon’s 2017 acquisition of Whole Foods, especially sales of perishable products, and have also benefited from increased purchasing during the pandemic.
The Chains channel (formerly the Supermarket channel) represents customers with more than 10 stores, and now accounts for 45% of total sales, versus 63% previously. In 1Q, sales in this segment rose 5% to $3.0 billion. The results included declines in sales to retailers focusing on prepared foods.
The Independent channel includes smaller customers with fewer than 10 locations, and accounts for 25% of total sales, up from 10% previously. First-quarter sales rose 7.4% to $1.7 billion, as more consumers moved from cities to suburbs and shopped at smaller local stores.
The Retail channel, which accounted for 9% of sales, grew 15.5%, driven by strong e-commerce sales at Cub Foods. First-quarter sales in this channel fell 1.5% as lower military and foodservice sales more than offset growth in online sales.
Our estimates reflect our expectations for continued high sales volumes in FY21, though with some moderation in the second half of the year.
The company is not rated by any of the credit rating agencies. The SUPERVALU acquisition was financed with a seven-year, $1.8 billion term loan and a $100 million increase in the company’s five-year ABL credit facility. The company also added a $150 million one-year term loan.
Total liabilities were $6.6 billion, up from $6.4 billion; long-term debt increased to $2.6 billion from $2.4 billion. Capital expenditures were 0.62% of sales, down from 0.72% a year earlier due to reduced investment in distribution center expansion. Management remains focused on reducing leverage, and does not intend to pay dividends or repurchase stock until it meets its long-term debt and EBITDA leverage target of 2.0- to 2.5-times. It will also forego M&A opportunities in the near term.
MANAGEMENT & RISKS
Steven L. Spinner is the chairman and CEO of United Natural Foods. He joined the company as CEO in 2008 after serving as the CEO of Performance Food Group Co. Paul Zechmeister has been the CFO since 2015.
Investors in UNFI shares face risks. UNFI’s earnings growth could be hurt by slower consumer spending and weakness in the organic food industry, as well as by the consolidation of natural products retailers and the growth of supernatural chains, which may pressure margins. The company has also faced problems with distribution in the past, but has opened new distribution centers to boost capacity and lower costs. We also note that UNFI shares are very sensitive to industry trends and tend to move in line with those of other natural and organic food companies.
United Natural Foods Inc. is the largest wholesale distributor to the natural, organic and specialty food industry in the U.S. and Canada. UNFI’s customers include natural and conventional supermarket chains, independent health food retailers, and foodservice providers.
Our FY21 estimate, well below the low end of the five-year range of 9-29 and below the average for a peer group that includes Sysco Corp., Hain, Performance Food Group, and U.S. Foods Holding Corp. However, we are concerned that current high demand, driven by the pandemic, may be temporary, and are thus reiterating our HOLD rating. If the company’s recent gains lead to sustainable sales and margin improvement, we would consider an upgrade to BUY.
On December 14 at midday, HOLD-rated UNFI traded at $15.31, down $0.27.