New United Natural Foods Inc. (UNFI) CEO J. Alexander “Sandy” Douglas took part in his first earnings call with the company, which eked out a sales gain for its 2021 fiscal year but topped the high end of Wall Street’s earnings forecast.
For the fourth quarter ended July 31, net sales totaled $6.74 billion, down 0.5% from $6.77 billion a year earlier, when the grocery distributor reported a 0.4% uptick (8% on a comparable basis) amid strong customer demand fueled by the COVID-19, UNFI said Tuesday. Sales for the 2021 quarter were up 7.5% on a two-year stack, the company noted.
Full-year 2021 net sales rose 1.5% to $26.95 billion from $26.56 billion in 2020, which saw 18.9% year-over-year sales growth from pandemic-driven demand.
“I’ve been on the job for about seven weeks now, and I’ve spent the majority of my time meeting with customers, our senior team and with associates across the organization, focusing on growth opportunities for customers and how we can all work together to capture these opportunities in a very complex operating environment,” Douglas told analysts in a conference call on Tuesday morning.
"We have momentum in our business, and it is accelerating." — Sandy Douglas, UNFI CEO
“My early take is that there are significant opportunities to improve the way we serve existing and new customers and the opportunity to partner with suppliers to bring customers the highest-quality, differentiated products and services that they want and need,” said Douglas, who started as UNFI’s CEO on Aug. 9, succeeding Steven Spinner. “Importantly, as the COVID pandemic lingers, our operating environment remains challenging. From our suppliers to UNFI to our customers, we are all facing challenges making, moving and delivering products to our interdependent supply chains. So my focus will continue to be learning the full extent of this business and assisting our team as we manage through the challenges and execute our plans for the benefit of our incredible community of customers.”
Among UNFI’s customer channels, the supernatural category — consisting of Whole Foods Market, the company’s largest single customer — led the way in the 2021 fourth quarter with net sales climbing 11.8% to $1.25 billion (+15.4% over two years). However, sales were down to the distributor’s two biggest channels: Chains declined 2.2% to $3.01 billion (+6.7% over two years), while Independent Retailers fell 6.2% to $1.67 billion (+5.2% over two years). Retail channel sales, including the company’s Cub Foods and Shoppers stores, declined 6% to $613 million in the quarter (+15.2% over two years). Sales in the Other channel — including international customers outside of Canada, foodservice, e-commerce, conventional military business and other sales — inched up 0.7% to $572 million (+1.4% over two years).
“We believe our fourth-quarter results reflect the work under way as we begin to implement our Fuel the Future strategy. Focusing on the fourth quarter, sales totaled slightly more than $6.7 billion. This was down slightly from last year’s fourth quarter, as we’re now recycling the months in calendar 2020 with the elevated levels of early COVID-19 consumer demand,” UNFI President Christopher Testa said in the call. “Anticipated sales declined in our Retail, Independent and Chain channels, which are the largest gainers a year ago, and were partially offset by growth in the Supernatural and Other channels.”
Own brands were a bright spot for UNFI in the fourth quarter, including its Woodstock natural and organic label.
UNFI has generated some quarter-to-quarter sales momentum, according to Testa.
“On a sequential basis, our business is growing, as sales in the fourth quarter increased about 1.6% from the third quarter. About 80 [points] of the 160-basis-point increase was a result of accelerating inflation within our business, which increased to approximately 2.4% in the fourth quarter. The remaining 80 basis points was the result of the underlying strength of our customers’ retail business, our committed success with cross-selling and the addition of new customers. A meaningful portion of sequential increase came from our top 100 customers, where sales increased 2.2% from Q3 to Q4,” he said.
“The fourth quarter also included an incremental $80 million in cross-selling revenue, as customers continue to benefit from UNFI’s unmatched product variety and the value only we can add from consolidated purchases,” Testa noted. “In fiscal 2021, over $700 million of our total revenue came from cross-selling that was made possible by the merger of our conventional and natural businesses. Selling more to existing customers represents a $38 billion addressable opportunity, and we believe is UNFI’s unique advantage. With over 18,000 unit customers representing over 30,000 locations, UNFI has significant growth potential with customers we already service. New customers will also play an important role for our future growth, and our sales pipeline includes hundreds of opportunities to help us grow share within the $140 billion addressable market opportunity we previously discussed.”
For the full year, Supernatural again paced UNFI’s customer channels with net sales rising 7% to $5.05 billion, followed by growth of 2.8% to $2.44 billion for Retail and 0.8% to $12.1 billion for chains. Sales dipped by 0.9% to $6.64 billion for Independent Retailers and by 1% to $2.3 billion in the Other channel.
Own brands remain a sales catalyst for UNFI, Testa told analysts. “Our three-prong strategy for growth is built around increasing penetration with our existing customers, bringing own brands to new customers and channels that presently don’t carry them, and introducing innovative items that meet the evolving needs of today’s consumers,” he explained. “We’re making progress across all three fronts, as we’re now selling our own brands products to nearly an additional 500 stores that were onboarded during fiscal 2021. We’ve also introduced about 100 new items to our portfolio of products this year and plan to introduce another 150 in fiscal 2022, including more plant-based and functional ingredients SKUs.”
UNFI’s professional services business grew 12% in fiscal 2021, and the company expects another double-digit increase in fiscal 2022. “Our optimism is based on customer feedback that our portfolio of services adds value to their businesses and a robust pipeline of opportunities that our sales organization is actively pursuing,” Testa said. “In fiscal 2021, we introduced 17 new services, and we expect to launch a similar number this coming year, driven by current industry trends as well as feedback from customers on what problems we can help them solve.”
Testa also singled out bakery as a strong performer. “Our bakery category experienced double-digit growth in the fourth quarter,” he said. “Consumer demand has increased since the height of the pandemic, and UNFI is uniquely positioned with a broad portfolio of specialty items, including a majority of the SKUs we sell through our Tony’s Fine Foods portfolio.”
At the bottom line, fourth-quarter net income attributable to UNFI came in at $43 million, or 69 cents per diluted share, compared with $53 million, or 89 cents per diluted share, a year ago. Excluding $1.22 per diluted share in multi-employer pension charges and restructuring, acquisition and integration expenses, among other costs, adjusted net earnings per share were $1.18 versus $1.06 in the 2020 quarter. Analysts, on average, had projected adjusted EPS of 80 cents, with estimates ranging from 68 cents to 90 cents, according to Refinitiv.
Fiscal 2021 net income attributable to UNFI totaled $149 million, or $2.48 per diluted share, compared with a net loss of $274 million, or $5.10 per diluted share, in 2020. Adjusted EPS for 2021 was $3.88 versus $2.72 in 2020. Excluded charges for 2021 include $2.49 per share in pension and restructuring, acquisition and integration expenses, among other items. UNFI’s 2020 fiscal year reflected a $7.91 per-share goodwill impairment charge and $1.62 per share in restructuring, acquisition and integration expenses, among other costs.
Wall Street’s consensus estimate was for fiscal 2021 adjusted EPS of $3.49, with projections running from $3.40 to $3.63, according to Refinitiv.
Looking ahead, UNFI forecasts reported EPS of $3.60 to $3.90 and adjusted EPS of $3.90 to $4.20 for fiscal 2022, on net sales of $27.8 billion to $28.3 billion. Analysts’ average projection is for adjusted EPS of $3.38, with estimates ranging from $2.34 to $4.05.
“Despite the challenges that we’re managing, we have momentum in our business, and it is accelerating. And I believe our plans for the new fiscal year will carry that momentum forward,” Douglas said. “Under the leadership of my predecessor Steve Spinner and our senior team, we delivered a solid fiscal 2021, and we expect this new fiscal year to be even better. We start fiscal 2022 with less debt, an improved leverage ratio and plans for further growth, driven by a sincere focus on doing everything we can do to serve our customers.”