United Natural Follows Inorganic Growth Path

Buys rival grocery distributor Haddon House for $217.5 million

Source: Company's Website
Source: Company’s Website

Organic and specialty foods retailer United Natural Foods Inc. (NASDAQ: UNFI) announced its financial results for Q3 FY16 ended April 30th, 2016, on June 6th, 2016. The Company is a distributor of over 90,000 natural organic and specialty foods and non-food products to more than 45,000 customer locations in the U.S. and Canada. It offers products in six categories: grocery, general merchandise produce, perishables and frozen foods, nutritional supplements and sports nutrition, bulk and food service products, and personal care items.

United Natural operates under three divisions:

  • Wholesale division, which includes its natural organic and specialty distribution business in the U.S.; UNFI Canada, which is its natural organic and specialty business in Canada; Albert’s Organics Inc. and Select Nutrition;
  • Retail division, consisting of EOM, which operates its 12 natural products retail stores within the U.S.;
  • Manufacturing division, consisting of Woodstock Farms Manufacturing.

Acquisitions spree

Source: Company's Website
Source: Company’s Website

Over the past year, United Natural has worked significantly to expand its fresh produce, specialty products, and service offerings with the acquisitions of Nor-Cal, Global Organic, and Haddon House Food Products. Back in July 2014, United Natural acquired Tony’s Fine Foods, making it a wholly-owned subsidiary of the Company. Its recent acquisition of rival grocery distributor Haddon House Food Products in early 2016 for $217.5 million is expected to expand its ethnic and gourmet product categories.

Earnings dented by acquisition-related costs

United Natural’s Q3 FY16 net sales increased 0.8% to $2.13 billion compared to $2.11 billion for the year-ago quarter. Adjusted net sales increased 6.1% compared to the year-ago quarter, excluding the Y-o-Y impact of the previously disclosed termination of a customer distribution contract. United Natural terminated its contract as a distributor to Albertsons Companies Inc. on September 20th, 2015, much earlier than the original contract end date of July 31th, 2016. On the brighter side, United Natural’s net sales contribution from the acquisitions of Global Organic and Nor-Cal was approximately $18.1 million, or 0.9% of net sales, for 3Q FY16.

Gross margin decreased to 15.1% for 3Q FY16 compared to 15.4% for the same period last year, mainly due to pricing pressures, lower fuel surcharges, moderated supplier promotional activity, and a shift in sales mix towards lower margin categories. On the other hand, gross margin for 3Q FY16 was benefited by an improvement in supplier promotional activity and the favorable impact of foreign exchange on the Company’s Canadian business.

United Natural’s Q3 FY16 total operating expenses were 12% of net sales, a decrease of 12 basis points compared to the same period last year. Total operating expenses decreased $0.5 million to $256.4 million during the quarter under review compared to $256.9 million in the year-ago quarter. Total operating expenses for 3Q FY16 included approximately $0.9 million of acquisition-related costs and $1.2 million of startup costs related to the Company’s Gilroy, California facility.

Operating income, as a percentage of net sales, was 3.1% for 3Q FY16, a decrease of 16 basis points compared to the year-ago quarter. Operating income decreased $3 million to $66.0 million for 3Q FY16 compared to $69 million for 3Q FY15.

Consequently, the Company’s net income for 3Q FY16 decreased $3.5 million to $38.3 million, or $0.76 per diluted share, from $41.8 million, or $0.83 per diluted share, in the year-ago quarter. Operating cash flow and capital expenditures for 3Q FY16 were $81.0 million and $8.6 million, respectively, resulting in free cash flow of $72.4 million.

Fiscal 2016 Guidance

Based on recent acquisitions, the Company is updating its previous guidance for FY16 ending July 30th, 2016. United Natural expects net sales in the range of $8.46 billion to $8.50 billion in FY16, an increase of 3.4% to 3.8% over FY15. The Company expects GAAP earnings per diluted share for FY16 in the range of $2.39 to $2.45, compared to FY15 GAAP earnings per diluted share of $2.76. After adjusting for severance and other transition costs related to the restructuring plan of $4.8 million in the first nine months of FY16, termination of a customer distribution agreement, and acquisition costs of $1.9 million, adjusted earnings per diluted share for FY16 is estimated to be in the range of $2.47 to $2.53, compared to FY15 adjusted earnings per diluted share of $2.85.

Overview

U3United Natural has managed to buck the slump in trade seen with general merchandise retailers since it mainly deals with organic and gourmet products. Its slew of acquisitions has given it a leg-up with other smaller specialty and organic producers who lack distribution ties with major supermarket chains. The Company’s presence in the nutrition and wellness space also gives it an added cushion against the general sluggish trend in the retail sector.

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