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UNFI misses 1Q targets on natural/organic slowdown

Deflation, competition challenging retailers, CEO says

United Natural Foods fell short of its sales and earnings targets for the fiscal first quarter, citing a slowdown in the rate of growth for organic and natural foods, and deflationary and competitive challenges facing the distributor and its retail customers.

In a conference call discussing results Wednesday, UNFI CEO Steven Spinner said the company was anticipating natural organic industry growth of around 7%, vs. previous growth of near 10%.

“This is happening for several reasons,” Spinner explained. “The first is the law of larger numbers; we are no longer serving a retail niche, as many of our products are now mainstream. We also think lower levels of inflation, or deflation, are also having an impact on overall industry growth rates. In addition, same-store sales have slowed at many of our retail customers as they continue to operate in a highly competitive, consolidating and deflationary environment. What's more, they are facing competition from more channels and food delivery options, such as e-commerce and meal delivery services.

“Also, we believe consumer buying habits continue to evolve in a maturing consumer driven economy, pressuring overall growth rates,” he added.

For UNFI’s first quarter, which ended Oct. 29, Spinner said the company experienced deflation of 13 basis points vs. inflation of 2.4% in the year-ago period. “With 250 basis points less inflation over pricing this quarter, we worked just as hard, had the same costs, but with less revenue and gross profit to offset it,” he said.

As a result, he said, net earnings in the quarter decreased 2.9% to $29.2 million on $2.3 billion in sales, a 9.7% increase — 8% of which was attributable to recent acquisitions. Earnings per share of 58 cents missed consensus Wall Street estimates of 62 cents, and sales were also slightly below expectations. UNFI however confirmed its previous fiscal-year guidance of 11.3% to 13.3% sales growth and EPS in a range of $2.53 to $2.63.

Deflation shaved approximately $53 million in quarterly sales for UNFI, Spinner said. The impact was most severe in produce, which had deflation of about 7% in the quarter, which he said led to “complications” integrating newly acquired fresh produce businesses.

Citing an example, “if a year ago a produce case was $20, with deflation in the current year that same case was $18.60 today assuming 7% deflation. If our gross margin is the same on that case, at for example 20%, we earned $4 in gross margin on that case a year ago, but only $3.72 today. However, our costs behind delivering that case remain the same. And we don't believe the magnitude of the deflation or the lack of inflation is a long-term issue, it may continue throughout the next several quarters.”

Asked by an analyst whether the challenging conditions could lead to slower expansion by retail customers, Spinner acknowledged “we don't believe … that the dynamics within our existing customer base are going to get considerably better throughout the remainder of the fiscal year. But … we believe that retailers will rely more heavily upon us to use our supply chain, to use our infrastructure, to get product into the markets more readily, to get more distinctive items into the markets more readily, [and] to help retailers reset and redesign. And that's I think the only thing that we can rely on to give us some confidence that we can deliver the sales growth that we've talked about.”

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