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United Natural (UNFI) Q2 Earnings Top Estimates, View Lowered

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United Natural Foods, Inc. (UNFI - Free Report) 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.

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

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

United Natural Foods, Inc. price-consensus-eps-surprise-chart | United Natural Foods, Inc. Quote

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.

We note that this Zacks Rank #5 (Strong Sell) stock has crashed 44.2% in the past six months, wider than the industry’s decline of 8.8%.

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