Persistent produce price deflation is hampering sales growth and pressuring profits at United Natural Foods Inc., the company said in a second-quarter earnings call with analysts Wednesday.
The Providence, R.I.-based natural, organic and specialty distributor also said it is undertaking a restructuring that will eliminate or relocate 265 positions, mostly related to the integration of recent acquisitions and the migration to a national, shared services center to support its new, unified sales force initiative. UNFI will incur a charge of $3.5 million to $4 million in the fiscal second half, primarily related to severance and related employee separation costs.
Deflation totaled 0.3% in the quarter, despite slight overall inflation in center store, which UNFI said makes up the “vast majority” of its sales volume. Produce deflation continued to accelerate in the second quarter, and exceeded the 7% first-quarter decline by “several hundred basis points,” the company said.
“We are at a time right now where the magnitude of the deflation … especially in produce, is having a fairly meaningful impact on our top line,” said Steve Spinner, chairman, president and CEO of UNFI.
The company is projecting a range of between 0.5% deflation and 0.5% inflation for the full year, down 25 basis points from what it had previously projected for fiscal 2017, which ends July 29.
UNFI lowered its sales and earnings outlook for the full year, in part due to the pricing pressures in its perishables business.
The company is now projecting sales for the year of $9.38 billion to $9.46 billion, an increase of about 10.7% to 11.7% over fiscal 2016 sales. In December, UNFI had projected sales gains of 11.3% to 13.3%. The company also lowered its earnings guidance, to a range of $2.49 to $2.54 per share, vs. previous projections of $2.53 to $2.63.
Spinner said the company was optimistic about new customers coming on in the second half of the year and about sales-growth opportunities from its recent acquisitions, including its expanded capabilities in fresh distribution.
“We recognized that in order to continue to grow strategically, we were going to need to get to be a much bigger player in perishable [categories], because perishable was going to grow at a much faster rate than center store,” said Spinner.
After building out its perishables infrastructure, UNFI combined its sales team to sell across all categories.
“Now we are in a terrific position to sell more to our existing customers, which is the most efficient way and most profitable way for us to grow,” Spinner said.
After the acquisitions in the past year of Haddon House Food Products, Global Organic/Specialty Source, Nor-Cal Produce, and Gourmet Guru, Spinner said UNFI planned to “take a breather” from making additional acquisitions in the near term.
The acquisitions helped drive sales growth of 26.2% to the supermarket channel in the second quarter, the company said. Sales to the supermarket channel now account for 29.1% of UNFI’s volumes, vs. 34.2% for the supernatural channel, which includes Whole Foods.
E-commerce sales rise
Sales growth in e-commerce was also up in double digits for the quarter, at 15.4%, as the company focuses on providing an “endless aisle” of product for its retail customers’ Internet storefronts. E-commerce sales totaled $60 million in the second quarter.
Net income for the second quarter, which ended Jan. 28, was up 12.3%, to $25.5 million, on a sales increase of 11.6%, to $2.29 billion.
Year-to-date net income rose 3.6%, to $54.7 million, on a sales gain of 10.7%, to $4.56 billion.
Gross margins for the second quarter totaled 15.09% of sales, up 56 basis points over year-ago results, and gross margins for the 26-week year-to-date period were up 38 basis points, to 15.21% of sales.
Net sales and margins were positively impacted by the acquisitions, the company said. Margins also benefitted from other initiatives, including a new structure that includes three regional presidents.
In a research note, Bill Kirk, an analyst at RBC Capital Markets, said he expects UNFI’s margins to contract over the long term as its product lines become more ubiquitous.
“As Natural/Organic offerings become more pervasive and a strategically imperative traffic-driver, retailers will likely increasingly compete on price, and margins for the system would have to decrease,” he said.