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Conventional Indies' Sales Softness Impacts UNFI in Q3

A transitioning industry is challenging UNFI's new retail customers
Photograph by WGB Staff

Soft sales among independent conventional store operators now serviced by United Natural Foods Inc. are weighing on the distributor’s financial results but in a way are demonstrating the rationale for the deal made to service them, officials say.

Fiscal third-quarter sales for Providence, R.I.-based UNFI totaled $6 billion; the 125.1% growth reflected the added volume from its conventional counterpart, Supervalu, which it acquired in a $2.9 billion deal last year. But growth rates within that figure slowed, particularly in the legacy Supervalu business. That division had quarterly sales of $3 billion—a 420% increase—but saw a comparable sales decline of 3.6%. The supermarket channel represented 61.6% of total net sales.

Sean Griffin, UNFI’s COO, confessed he was “disappointed” in the conventional comp decline, saying struggling conventional customers need the natural and better-for-you center-store products UNFI can now provide for them, but they have been slow to take them on.

“There is a lot of competition at retail; I think everyone is aware of that. And our customers that are investing in their formats are winning, and the customers, frankly, that are not necessarily investing are struggling,” Griffin said, according to a Senteio transcript of UNFI’s quarterly conference call.

“Frankly, some of what we’re seeing is really the catalyst for why we’re putting our companies together,” he continued. “The customers that are struggling in the center store, they need our help. And where they need our help is in better-for-you food, it’s in differentiated food. And frankly, we bring an assortment to the game that is second to none. It's just going to take a little time.

Some of those businesses are also feeling effects of supply-chain disruption as UNFI consolidates distribution centers in the Pacific Northwest and in Pennsylvania as part of the cost-saving synergies underpinning their union. Officials said those challenges, which date to projects that were midstream when the companies came together, were stabilizing. A new distribution center in Centralia, Wash., part of a consolidation from five combined Pacific Northwest facilities to two, is on track to receive goods early this summer.

UNFI also encountered slowing sales growth rates in its legacy businesses. Net sales to independent natural food stores grew by 20.2% and represented approximately 13.9% of total net sales but grew by just 2.5%, excluding new business. Chris Mandeville, a Jefferies analyst, pointed out that was the slowest rate of growth in that channel in six quarters.

UNFI’s “supernatural” sales—almost entirely to Whole Foods Markets—grew by 11.1% in the quarter and represented 18.5% of revenues.

“The retail environment continues to be challenging for many of our top customers who are now growing at more moderate levels,” CEO Steven Spinner said. “New store openings have slowed as retailers adapt to changing consumer trends. However, we see signs of improvement ahead as higher inflation takes hold.

Quarterly gross margin was 13.22% of net sales, a decrease of 219 basis points compared to the same period last year, reflecting the impact of adding the conventional business, which operates at a lower gross margin rate.

Analysts in the call expressed concern for EBITDA that came in below expectations at $168 million in the quarter—and officials acknowledged its fiscal-year EBITDA figures would likely land in the low end of its guidance. However, they maintained confidence UNFI would meet its 2022 EBITDA and sales goals.

 

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