High demand for natural and organic foods led by Whole Foods and Amazon – along with a rapid expansion of the categories in which it distributes them – showed up in another quarter of robust sales growth for United Natural Foods Inc.
The Providence, R.I.-based distributor's sales in its fiscal second quarter increased by 10.67% to $2.5 billion, led by a 19.2% sales gain in what it calls its “supernatural” customers, consisting nearly entirely of sales to Whole Foods and Amazon. That category accounted for 36.8% of UNFI's total sales in the quarter, or roughly $920 million.
CEO Steven Spinner said the sales growth isn’t precisely reflective of the sales at its customers stores but also shows fruits of UNFI’s “build out the store” strategy to expand the variety of items it distributes, particularly fresh and specialty foods. But it would appear Amazon’s influence on Whole Foods is also sparking UNFI’s sales growth by providing a virtual market for its products and store-based traffic improvements through price promotions.
Revenues from Whole Foods in the quarter, which ended Jan. 27, represented its best quarterly performance in nearly five years.
The sales growth helped UNFI overcome challenges of capacity constraint in some markets and inbound freight woes brought about by a nationwide trucking crisis. Supplier out-of-stocks cost the chain an estimated $50 million of sales in the quarter, Spinner said. The outsized growth of sales to Whole Foods also had an effect on margins, which dipped by 39 basis points to 14.7% of sales in the quarter.
Financials were also affected by $11.4 million in noncash impairment and restructuring charges related to its Earth Origins Market retail stores, three of which will be closing.
These challenges contributed to a quarterly operating income decline of 13.2% to $40.2 million. Excluding restructuring and impairment expenses, operating improved by 11.2% compared to the same period last year, officials said.
“Tight capacity brings challenges beyond warehouse operations and extends to our gross margin as we are more restricted in our ability to forward buy into rising markets and manufacture promotions,” Spinner said. “Additionally, our inbound freight rates have increased incrementally during the quarter, driven primarily by market supply constraints. We expect that these headwinds will continue through the balance of the fiscal year, but at a more moderated rate.”
Growing demand and variety also showed up in improved sales to conventional chains, which saw a 6.4% sales increase in the quarter; and to independent retailers, which saw 5.6% sales growth.
Categories of products showing significant growth in the period included single-service beverages, salty snacks, spices and grains, nutritional bars, yogurt and protein and meal-replacement powders. In wellness categories, digestive health grew by 70%, vitamins improved by 74% and personal care sales increased by 34% in the quarter.