It has been about a month since the last earnings report for United Natural Foods (UNFI). Shares have added about 84% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is United Natural due for a pullback? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
United Natural Q2 Earnings Top Estimates, View Lowered
United Natural Foods, Inc. reported second-quarter fiscal 2020 results, wherein the bottom line declined year over year. Net sales, which missed the Zacks Consensus Estimate, was hurt by softness in most channels, apart from Supernatural. Further, results in the quarter were hurt by charges related to three customer bankruptcies. This, in fact, compelled management to lower its earnings and adjusted EBITDA guidance for fiscal 2020.
Q2 in Detail
United Natural’s adjusted earnings of 32 cents per share tumbled 27.3% year over year, though it came ahead of the Zacks Consensus Estimate of 27 cents. The year-over-year decline can be attributable to charges related to customer bankruptcies along with lower net income from discontinued operations.
Net sales amounted to 6,137.6 million compared with $6,149.2 million reported in the year-ago quarter. Moreover, the top line missed the Zacks Consensus Estimate of $6,156 million. Sales were hurt by softness in all customer channels, apart from Supernatural that saw solid growth.
Meanwhile, the company’s gross margin expanded 24 basis points (bps) to 12.53%, courtesy of lower inbound freight costs. However, the gross margin rate in the quarter under review was somewhat hurt by charges related to customer bankruptcies.
Adjusted operating income came in at $24.6 million in the quarter, up from $18.5 million reported in the year-ago period. Adjusted operating margin grew from 0.3% to 0.4% of net sales, courtesy of improved gross margin. Adjusted EBITDA declined 8.1% to $131.1 million and was hurt by customer bankruptcy-related charges. Excluding these charges, adjusted EBITDA grew in low-double digits.
Segment Sales
From a channel point of view, Supernatural net sales rose 10% year over year, contributing about 19% to total sales in the fiscal second quarter. This was backed by greater sales to existing stores as well as contributions from new locations.
Supermarkets channel net sales slipped 1.2% and contributed more than 63% to total sales. This is a result of reduced sales to existing key small customers.
Sales in the Independents channel fell 6.5% on account of lost businesses and store closures.
In the Other channel, net sales dropped 6.3%, largely due to the company’s decision to exit part of its military business. This was somewhat compensated by gains from some non-traditional customers and revenue channels.
Other Financial Updates
The company ended the quarter with cash and cash equivalents of $40.1 million, long-term debt of $2,917.1 million and total shareholders’ equity of $1,099.1 million.
During the second quarter, United Natural’s debt level declined $149 million on a sequential basis.
United Natural is on track to sell or shutter 19 Shoppers stores this year in the Baltimore-Washington region. Also, it is in the process of marketing the remaining Shoppers stores, as part of its continued efforts to divest the retail business. The retail landscape continues to be challenging, evident from various customer store closures.
Fiscal 2020 Guidance
For fiscal 2020, management continues to expect net sales of $23.5-$24.3 billion. In fiscal 2019, net sales amounted to $21.4 billion.
Management lowered its adjusted EBITDA and bottom-line guidance for fiscal 2020, considering charges related to customer bankruptcies incurred in the second quarter. Adjusted EBITDA is now anticipated in a band of $520-$560 million compared with the previous range of $560-$600 million. Management expects adjusted EBITDA to be stronger in the fourth quarter of 2020 than the third quarter, courtesy of reduced operating costs and gains from cost synergies.
The company now envisions adjusted earnings per share in the range of 85 cents to $1.45 per share compared with the prior view of $1.22-$1.76. In fiscal 2019, the company’s earnings came in at $2.08.
How Have Estimates Been Moving Since Then?
It turns out, estimates review flatlined during the past month. The consensus estimate has shifted -12.5% due to these changes.
VGM Scores
Currently, United Natural has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren’t focused on one strategy, this score is the one you should be interested in.
Outlook
United Natural has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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