United Natural Foods, Inc.UNFI posted fourth-quarter fiscal 2018 results, wherein both the top and the bottom lines improved year over year. However, shares of the company lost 10.1% during yesterday's after-market trading session as earnings and sales missed the Zacks Consensus Estimate after delivering five and three consecutive quarters of positive surprises, respectively.
While results gained from strength across most customer channels owing to solid demand, greater-than-expected freight expenses and unfavorable mix shift continued to pose hurdles for the bottom line. Like many other food companies, United Natural has been battling freight cost headwinds for a while now. Incidentally, the company's shares have tumbled 19.3% in the past three months against the industry 's growth of 1.9%.
This distributor of food and non-food products reported adjusted earnings of 76 cents per share, which improved 5.6% year over year but came below the Zacks Consensus Estimate of 85 cents. The bottom-line growth was backed by benefits from tax reforms, partly negated by unfavorable customer mix shift and increased inbound freight expenses.
United Natural Foods, Inc. Price, Consensus and EPS Surprise
Net sales increased 10.7% year over year to $2,592.2 million, driven by consistent strength in product demand. In fact, sales grew across all key channels. However, United Natural's sales fell short of the Zacks Consensus Estimate of $2,601 million.
The company's gross margin contracted 125 basis points (bps) to 14.5% on account of an unfavorable shift in consumer mix. Notably, sales from lower-margin customers grew at a higher rate than other customers. Higher inbound freight costs also weighed on gross margin during the quarter.
Adjusted operating income declined 7.8% to $59.3 million, owing to factors hurting the gross margin, which was somewhat made up by lower fixed costs. Consequently, the adjusted EBITDA fell 6.4% to $81 million. We note that the company continued to witness modest inflation of roughly 27 bps in the fourth quarter, which marked United Natural's ninth straight period of either near-zero inflation or modest deflation. Clearly, absence of historic inflationary levels is a hurdle for United Naturals' EBITDA growth.
From a channel point of view, supernatural net sales surged 27.5% year over year, accounting for 37.9% of total net sales in the quarter.
Conventional supermarket channel net sales rose 1.1% during the quarter. It represented 27.3% of total net sales.
Sales at the independently owned natural retailers jumped 5.7% and represented 25.1% of the company's net sales.
Net sales from other channel dipped 1.5% and constituted 9.7% of United Natural's top line. The year-over-year decline was accountable to the complete sale of Earth Origins Market retail business.
Within the other channel, food service net sales jumped 3.6%, whereas e-commerce sales fell 2.8% due to certain rationalization initiatives.
Other Financial Updates
United Natural ended the quarter with cash and cash equivalents of $23.3 million, long-term debt (excluding current portion) of nearly $137.7 million and total shareholders' equity of approximately $1,846 million.
The company's cash flow from operations came in at $109.5 million, while capital expenditures were approximately $44.6 million during fiscal 2018. Thus, United Natural generated free cash flow of roughly $64.9 million.
Fiscal 2019 Guidance
United Natural intends to conclude the buyout of SUPERVALU INC. SVU during the fourth quarter of calendar year 2018 and management is gearing up for a successful integration. The merger is expected to provide better competing grounds to United Natural in the grocery space by augmenting its offerings. Notably, this Zacks Rank #3 (Hold) company expects to realize net run-rate cost synergies worth more than $175 million in the third year of the deal. Further, United Natural is well positioned for growth, considering consumers' solid demand for better-for-you food products and services.
All said, management projects net sales for fiscal 2019 to be $11.1-$11.3 billion, which depicts growth of 8.6-10.5% from fiscal 2018 sales figure.
Effective tax rate is anticipated to be 27.4-28.4%. Finally, the company envisions fiscal 2019 adjusted earnings to be $3.48-$3.58 per share, reflecting year-over-year increase of 11.8-15%. The current Zacks Consensus Estimate is pegged at $3.54.
On a GAAP basis, earnings are estimated to be $3.35-$3.45, representing a rise of 2.6-5.7% from fiscal 2018 figure.
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