United Natural Foods, Inc.UNFI posted third-quarter fiscal 2018 results, wherein both the top and bottom line improved year over year and surpassed estimates. This marked the fifth and third consecutive quarter of earnings and sales beat for the company, respectively.
United Natural Foods, Inc. Price, Consensus and EPS Surprise
However, net sales and EBITDA growth was somewhat impacted by absence of meaningful inflation. Also, United Natural generated negative free cash flow owing to increased inventory levels. It looks like these factors and some cost hurdles weighed on investors' sentiment as despite the solid results and raised outlook, shares of the company dropped 6.1% during the after-market trading session.
This distributor of food and non-food products reported third-quarter adjusted earnings of $1.04 per share, which beat the Zacks Consensus Estimate of 93 cents and improved 35.1% year over year.
Net sales came in at $2,648.9 million, up 11.8% year over year, cruising ahead of the Zacks Consensus Estimate of $2,579 million. The upside was driven by continued rise in product demand.
The company's gross profit rose 11.4% to $408.1 million. However, gross margin fell 5 basis points (bps) to 15.41% 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 grew 19.5% to $82.3 million. Further, the company's adjusted EBITDA improved 15.1% to $104 million.
From a channel point of view, supernatural net sales surged 24.3% year over year, which marked the highest-ever year-over-year growth rate at this channel in more than five years. The channel accounted for 37.5% of total net sales in the quarter, marking an improvement of 380 bps from the year-ago quarter.
Conventional supermarket channel net sales increased 3.7% during the quarter. It represented 27.1% of total net sales.
Sales at the independently owned natural retailers rose 6.1% and represented 25.1% of the company's net sales.
Food service net sales jumped 4.6% and e-commerce sales soared nearly 23% during the third-quarter fiscal 2018.
Other Financial Updates
In October 2017, management announced a share buyback plan of up to $200 million. To this end, the company has repurchased 564,660 shares for approximately $22.2 million on a year-to-date basis.
United Natural ended the quarter with cash and cash equivalents of $21.8 million, long-term debt (excluding current portion) of nearly $140.7 million and total shareholders' equity of $1,812.3 million.
The company's cash flow from operations came in at negative $20 million, while capital expenditures were approximately $14.1 million during the third quarter. Thus, United Natural used free cash flow of roughly $34.1 million.
Fiscal 2018 Guidance
Management is impressed with the business performance during the quarter, with consistent broad-based improvement across all important sales networks. The company's solid market position helps it grow even amid a changing retail landscape.
With sophisticated distribution networks and fulfillment centers, United Natural's growth in the omnichannel arena is quite remarkable. Further, the company believes that it is well placed for growth, considering consumers' solid demand for United Natural's better-for-you food products and services. It also expects that effective sourcing strategies and acquisitions will aid the company meet long-term strategic objectives.
Notably, United Natural Foods' impressive earnings history and focus on strategic endeavors have helped this Zacks Rank #3 (Hold) stock gain 5.6% in the past three months against the industry 's decline of 6.7%.
However, the company has been incurring higher labor expenses across several distribution centers, owing to increased growth from the year-ago period. Also, inbound fill rates related to the strong expected demand remains a hurdle. Nonetheless, United Naturals is focused on enhancing supply chain networks to better align supplies with demand.
All said, management raised its previously issued sales and earnings view for fiscal 2018, projecting net sales in the range of $10.23-$10.28 billion compared with the previous band of $10.01-$10.16 billion. The updated outlook depicts growth of 10.3%-10.8% from fiscal 2017 sales figure.
Management now envisions adjusted earnings for fiscal 2018 in the range of $3.18-$3.23 per share, up from $3.06-$3.14 forecasted earlier. The latest outlook depicts a year-over-year increase of 23.6%-25.6%, better than the prior expectation of 19.5%-22.7%. The current Zacks Consensus Estimate is pegged at $3.10, which is likely to witness upward revision in the coming days.
On a GAAP basis, earnings are now estimated in the range of $3.39-$3.44 compared with the previous projection of $3.27-$3.35 per share. The updated GAAP earnings forecast depicts a rise of 32.2%-34.2% from fiscal 2017 figure.
Notably, management's earnings view for fiscal 2018 (both GAAP and non-GAAP) takes into consideration the benefits arising from the tax reforms. Also, management foresees adjusted tax rate for fiscal 2018 in the range of 32.1%-32.4% compared with 33%-33.3% expected earlier.
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