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United Natural (UNFI) Rallies on Q2 Earnings Beat, Higher Sales

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Shares of United Natural Foods, Inc. (UNFI - Free Report) gained 18.2% as it delivered robust results for the second quarter of fiscal 2021, with both top and bottom lines growing year over year. Additionally, the bottom line exceeded the Zacks Consensus Estimate. To top it, management said that it now expects to end fiscal 2021 toward the upper end of its previously offered view for adjusted EBITDA and earnings per share (EPS). Results continued to benefit from strong retail demand and lower costs.

Markedly, this Zacks Rank #3 (Hold) stock has more than doubled in the past three months compared with the industry’s growth of 4.7%.

United Natural Foods, Inc. Price, Consensus and EPS Surprise

Quarter in Detail

United Natural’s adjusted earnings of $1.25 per share cruised past the Zacks Consensus Estimate of 92 cents. Moreover, the bottom line rose significantly from 25 cents reported in the year-ago period. The year-over-year surge can be attributed to greater net sales and an improved operating income.

Net sales from continuing operations came in at $6,888 million, which lagged the Zacks Consensus Estimate of $6,910 million. Nonetheless, net sales advanced 7.1% year over year, marking an increase of 110 basis points from a 6% rise in the first quarter. Sales growth was backed by robust customer demand from existing as well as new retailers, including continued gains of cross-selling. However, the upside was somewhat negated by the impact of previously lost stores, which include shutdowns related to three customer bankruptcies before the pandemic.

Markedly, cross-selling initiatives generated additional sales worth nearly $90 million in the second quarter and United Natural expects to generate cumulative cross-selling revenues of $1 billion by the end of fiscal 2022. We note that the company is gaining business in all categories such as fresh and general merchandise, grocery, frozen, center store and others. Apart from these, its sales are benefiting from e-commerce strength, thanks to increased e-commerce solutions offered by the company. E-commerce sales surged a whopping 97% in the quarter, on the back of new business as well as higher sales to the company’s biggest e-commerce customer. Retail channel e-commerce sales remained strong, with about a 190% jump at Cub.

Meanwhile, the company’s gross margin came in at 14.38%, higher than 14.26% reported in the year-ago quarter. The upside was driven by contributions of nearly 0.13% from the Retail business, which in turn stemmed from reduced promotional expenditure as well as Retail forming a bigger proportion of net sales. Gross margin at the Wholesale and the remaining businesses was nearly flat year over year as gains from reduced shrink were countered by reduced supply-related income.

Adjusted operating income came in at $123.1 million in the quarter, up from $54.1 million reported in the year-ago quarter. Adjusted operating margin increased from 0.84% to 1.79%, courtesy of higher net sales, increased gross margin, reduced benefit costs and fixed operating expense leverage on increased sales. Moreover, adjusted EBITDA jumped 57.4% to $206.3 million.

Segment Sales

From a channel point of view, Supernatural net sales increased 7.2% year over year to $1,298 million. Net sales from the Chains channel rose 6.5% to $3,097 million. Sales in the Independent retailers channel came in at $1,701 million, up 9% year over year. In the Retail channel, net sales increased 15.2% to $621 million. Other sales came in at $568 million, up 0.4%.

Other Updates & Outlook

The company ended the quarter with cash and cash equivalents of $40.5 million, long-term debt of $2,374.3 million and total shareholders’ equity of $1,229.1 million. Further, the company’s total debt (net of cash) was $2.49 billion as of the end of the second quarter, representing a decline of $242 million from the preceding quarter. The decline in debt level can be attributable to cash from operations of $265 million recorded in the second quarter of fiscal 2021. The company’s net debt to adjusted EBITDA leverage ratio improved to 3.2x as of the second-quarter-end.

The company expects food-at-home consumption to stay high in fiscal 2021. Further, it expects at-home consumption to outpace away-from-home consumption in the remaining parts of fiscal 2021. Incidentally, work-from-home trends are likely to stay for a while. Also, a number of Americans are focused on managing their household budget efficiently, as part of which they opt for reasonable options like dining at home. Apart from these, increased demand for better food options with ingredient transparency works well for United Natural.

Certainly, United Natural remains committed to optimizing distribution networks, creating increased operating benefits to its Value Path initiative, curtailing the cost structure and making technology-related investments. Also, management remains encouraged about its recently extended deal with its biggest customer — Whole Foods Market. Per the deal, the term of the primary distribution agreement between United Natural and Whole Foods is now extended till Sep 27, 2027.

Fiscal 2021 Guidance

Management reiterated its fiscal 2021 view, though it now expects adjusted EPS and adjusted EBITDA to come in at the upper end of the previously guided view. However, the company’s third-quarter fiscal 2021 sales, adjusted EBITDA and adjusted EPS are likely to be lower than the year-ago period, which gained from an unexpected surge in pandemic-induced demand. Nevertheless, management is confident about its full-year view.

Management anticipates fiscal 2021 net sales of $27-$27.8 billion. This suggests 3.3% growth over fiscal 2020 at the midpoint. United Natural expects adjusted EBITDA toward the upper end of the previously guided range of $690-$730 million that indicates a 5.5% rise over fiscal 2020 at the midpoint. Also, it envisions adjusted earnings to come in at the higher end of its earlier guided band of $3.05-$3.55 per share, which indicates an increase of 21.3% from fiscal 2020 levels at the midpoint.

The company still expects fiscal 2021 capital expenditure in the range of $250-$300 million and a net debt reduction of about $250 million.

Better-Ranked Food Stocks

The J.M. Smucker (SJM - Free Report) has a Zacks Rank #2 (Buy) and its bottom line has outpaced the Zacks Consensus Estimate by 17.7% in the trailing four quarters, on average. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Medifast (MED - Free Report) , which currently carries a Zacks Rank #2, has a trailing four-quarter earnings surprise of 17.4%, on average.

Hain Celestial (HAIN - Free Report) has a Zacks Rank of 2 and a trailing four-quarter earnings surprise of 26.7%, on average.

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