United Natural Misses on Q3 Earnings, Narrows Guidance - Analyst Blog

Specialty foods distributor, United Natural Foods, Inc. UNFI delivered third quarter fiscal 2014 earnings of 73 cents per share, which missed the Zacks Consensus Estimate by a penny. Earnings surged 14.1% from the prior year adjusted earnings of 64 cents, driven by top-line growth, cost control initiatives and improved operating margin, which offset higher outstanding share count.

Revenue and Margin Details

Net sales for the quarter increased 13.8% year over year to $1.782 billion but missed the Zacks Consensus Estimate of $1.785 billion by a slight margin. The results were driven by continuous increase in demand for the company's organic and natural food products and robust acquisitions. Trudeau Foods, acquired in the first quarter of fiscal 2014, contributed net sales of approximately $18.0 million.

Supermarket sales increased 17.8% in the second quarter, with supermarkets representing 25% of sales. Supernatural channel sales increased 11.9% and it represented 36% of sales in the third quarter of fiscal 2014. Sales growth in the Independent channel was 10.2% and represented approximately 33% of sales. Food service comprised approximately 3.5% of total sales and increased 20.5% in the third quarter.

Gross margin declined 10 basis points to 16.7% in the reported quarter, mainly due to foreign currency headwinds. Additionally, the decline was due to poor weather, which obstructed inbound transportations.

The company continued to focus on its core strategies to further increase market share while improving the operational efficiency of the businesses.

The company's productivity initiatives helped reduce operating expense ratio by 13 basis points in the third quarter to 13.2%, which boosted operating income margin. Operating income margin increased 7 basis points to 3.5% in the reported quarter.

Acquisition Update

On May 23, United Natural agreed to acquire all the shares of Tony's Fine Foods, a specialty distributor of perishable food products for about $195.3 million. The acquisition aims at expanding its business in Western U.S. It will also boost its cheese and deli meat offerings. As part of the deal, which is expected to close by July, United Natural Foods will pay $187.8 million in cash for Tony's Fine Foods and buy 112,000 shares of Tony's Fine Foods. The shareholders will use that money to pay Tony's Fine Foods debts.

Fiscal 2014 Guidance

United Natural has revised its guidance for fiscal 2014. It now expects sales to be in the range of $6.73 billion to $6.77 billion, compared with the prior range of $6.70-$6.78 billion. This marks an increase of 11% to 11.6% over fiscal 2013 (including the additional week in fiscal 2013). Adjusting for approximately $190 million of net sales for the 53rd week in fiscal 2013, net sales growth for fiscal 2014 is expected to be in the range of approximately 13.2% to 13.8%.

The company has also narrowed its reported earnings guidance for fiscal 2014 to a range of approximately $2.47 - $2.50 per share from the prior expectation of $2.45 to $2.51 per share. This marks an increase of approximately 13.3% to 14.7% over fiscal 2013 reported earnings of $2.18 per share.

Our Take

With increasing demand for a healthy lifestyle, food safety and environmental sustainability, the demand for organic products is growing rapidly. Moreover, it is believed that the growth rate of the natural products industry has outpaced the growth of the overall food-at-home industry.

United Natural currently holds a Zacks Rank #3 (Hold). Some better-ranked food companies include BRF S.A. BRFS, B&G Foods Inc. BGS and The Hain Celestial Group, Inc. HAIN. While BRF S.A. carries a Zacks Rank #1 (Strong Buy), B&G Foods and Hain Celestial hold a Zacks Rank #2 (Buy).

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