United Natural Q3 Earnings Beat, Stock Up On Raised View

Shares of specialty foods distributor United Natural Foods, Inc. (NASDAQ:UNFI) increased 11.38% in after-hours trading on Jun 6, after the company posted better-than-expected earnings in the third quarter of fiscal 2016 and raised its outlook for fiscal 2016.

This Providence, RI-based company reported third quarter earnings of 76 cents per share. Earnings beat the Zacks Consensus Estimate of 66 cents by 15.2% but declined 8.4% from the prior-year quarter earnings of 83 cents due to lower gross and operating income margins. The impact of acquisitions was neutral to earnings in the third quarter of fiscal 2016 including $0.9 million of related acquisition costs. Net income for the third quarter of fiscal 2015 included a gain of $4.2 million associated with the transfer of land at the company's Prescott, WI facility.

Revenue and Margin Details

Net sales of $2.13 billion lagged the Zacks Consensus Estimate of $2.17 billion, but increased 0.8% from the prior-year quarter. Net sales in the quarter include the impact of the previously disclosed termination of a customer distribution contract. Excluding this, adjusted net sales increased 6.1% in the quarter. Acquisitions of Global Organic/Specialty Source, Inc. ("Global Organic") in March and Nor-Cal Produce, Inc. ("Nor-Cal") in April contributed about $18.1 million to net sales.

Despite a year-over-year increase in revenues, gross margin declined 29 basis points (bps) to 15.1% in the reported quarter. The decline was due to competitive pricing pressure, a reduction in fuel surcharges, moderated supplier promotional activity, and a shift in the mix of sales towards lower margin categories. Nevertheless, gross margin improved 59 bps sequentially driven by a sequential improvement in supplier promotional activity and the favorable impact of foreign exchange for the company’s Canadian business.

Adjusted operating margin decreased 16 bps to 3.1% due to lower gross margin.

Fiscal 2016 Guidance Raised

United Natural raised its fiscal 2016 sales and earnings guidance, based on the company's performance, recent acquisitions and the positive outlook for the remainder of fiscal 2016. For fiscal 2016, the company now expects net sales in the range of approximately $8.46 billion to $8.50 billion, up from the previous range of $8.31 billion to $8.43 billion, announced on the second quarter conference call. Sales from acquisitions are expected to come in at or above approximately $160 million, adding 2% to fiscal 2016 net sales. The new guidance is approximately 3.4% to 3.8% up over fiscal 2015.

Adjusted earnings for fiscal 2016 are now estimated in the range of $2.47 to $2.53, compared with fiscal 2015 adjusted earnings per diluted share of $2.85. The new guidance is higher than the previously guided range of $2.34 to $2.44 per share. The revised guidance includes acquisitions of Nor-Cal, Global Organic, and Haddon House (completed in May), which are expected to be neutral to EPS in fiscal 2016, including acquisition-related costs. However, the Zacks Consensus Estimate of $2.37 is below the new guidance range.

Though encouraged by consumers’ increasing demand for organic products, driven by a healthy lifestyle, food safety and environmental sustainability, we cannot ignore the fact that the company has been struggling from continued weakness in gross margin over the past few quarters. This is due to a shift in customer mix to the lower-margin supermarkets channel. The company’s recent acquisitions, though adding to top-line growth, are also putting pressure on margins.

United Natural has a Zacks Rank #3 (Hold). Some better-ranked food companies include Omega Protein Corp. (NYSE:OME) , B&G Foods, Inc. (NYSE:BGS) and Post Holdings, Inc. (NYSE:POST) . All of these hold a Zacks Rank #1 (Strong Buy).

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