United Natural Foods, Inc. (UNFI - Free Report) posted first-quarter fiscal 2018 results, wherein both top and bottom lines improved year over year and surpassed estimates. While earnings marked its third straight beat, revenues crushed its 11-quarter long trend of reporting negative surprises.
This distributor of food and non-food products reported first-quarter adjusted earnings of 62 cents that came ahead of the Zacks Consensus Estimate by a couple of cents and jumped 6.9% year over year. The bottom line included 2 cents impact from the adoption of Accounting Standard Update (ASU) 2016-09 and improvements in Employee Share-Based Payment Accounting during the quarter. Excluding this charge, earnings rose 4.4% to 60 cents per share.
Q1 in Detail
Net sales of $2,457.5 million advanced 7.9% year over year, driven by broad-based improvements in all core channels. Moreover, the top line cruised ahead of the Zacks Consensus Estimate of $2,389 million.
The company’s gross profit increased 5.2% to $367.2 million though the gross margin contracted 38 bps to 14.9% on account of an unfavorable shift in consumer mix. Notably, sales from lower margin customers grew at a higher rate than other customers.
United Natural Foods witnessed a 5.6% rise in operating expenses, which came in at $312.1 million. As a percentage of sales, operating expenses decreased 28 bps to 12.7%, mainly thanks to fixed cost leverage on higher sales. This was partly countered by increased labor, outside storage and transport expenses. Also, the company noted an increase in healthcare expenses, when compared with the prior-year period.
Operating income grew 3.3% to $55.1 million, while the operating margin contracted 10 bps to 2.2%. Further, the company’s EBITDA improved 4% to $77.5 million, whereas the EBITDA margin contracted 11 bps to 3.2%.
From a channel point of view, supernatural net sales increased 14.3% year over year, driven by greater demand. The channel accounted for 34.7% of total net sales in the quarter, marking an improvement of 190 bps from the year-ago period.
Supermarket channel net sales increased 4.7% during the quarter. It represented 28.6% of total net sales.
Sales of the independent channel went up 6.6% in the first quarter and represented 26.0% of the company’s net sales.
Net sales of food services climbed 1.2%, gaining from e-commerce growth of 32.1%. Notably, this marked the highest quarter of year-over-year e-commerce sales growth since the third-quarter of fiscal 2016.
Other Financial Updates
During the quarter, the company repurchased 162,000 shares for approximately $6.4 million. Moreover, on Oct 6, management announced a share buyback plan of up to $200 million.
United Natural ended the quarter with cash and cash equivalents of 21.2 million, long-term debt of nearly $147 million and total shareholders’ equity of $1,708.1 million.
Additionally, the company used $72 million of cash as operating activities, while capital expenditures were approximately $5.3 million during the first quarter. Thus, United Natural generated negative free cash flow of $77.3 million. The company stated that its first quarter usually records the lowest free cash flow, owing to raised inventories for the holiday season demand — which was exceptionally high this time.
Fiscal 2018 Guidance
Management remains impressed with an impressive start to the fiscal, with broad-based improvement across all important sales networks in the first quarter. Further, it believes that the company remains well placed for growth, given consumers’ solid demand for United Natural’s better-for-you food products and services; across all channels including retails stores; food service; e-commerce and international.
Notably, United Natural Foods’ impressive earnings history and focus on strategic endeavors has helped this Zacks Rank #2 (Buy) stock surge 26% in the past six months, as against the industry’s fall of 3.9%.
Additionally, the company stated that it continued to witness record sales and shipping unit volumes in the second quarter. However, inbound fill rates related to the unexpected demand remains a hurdle, which also weighed on sales in the first quarter. Nonetheless, United Nations is focused on enhancing its supply chain networks to better align supplies with demand. All said, management raised its previously issued sales and earnings view for fiscal 2018.
United Natural now expects net sales for fiscal 2018 to be in the range of $9.84-$10.0 billion, in comparison with the previously guided range of $9.63-$9.81 billion. The updated outlook depicts growth of 6.2-7.8% from fiscal 2017 sales figure, while the prior outlook reflected a rise of 3.8-5.8%. The Zacks Consensus Estimate for fiscal 2018 net sales is currently pegged at $9.7 billion, which is lower than the company’s latest guidance.
Management now envisions earnings for fiscal 2018 to be in the range of $2.72-$2.80 per share, compared with the old range of $2.67-$2.77. Further, the raised outlook reflects an increase of about 6.3-9.4% from the fiscal 2017 figure, in comparison with the previously anticipated growth of 4.3-8.2%. The current Zacks Consensus Estimate of $2.71 is below this guided range. Also, we note that management foresees tax rate for fiscal 2018 to range from 40-40.3%, as compared to 40.3-40.7% expected earlier.
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