Wholesaler United Natural Foods Inc. said it was nearing two important milestones—an extension of its supply contract for longtime customer Whole Foods Market and a new CEO to succeed the retiring Steve Spinner—but neither bit of clarity appeared to cure investor anxiety.
Reviewing financial results from its fiscal first quarter, Providence, R.I.-based UNFI said results for the period reflected continuing if moderating benefits of the food-at-home shift associated with the COVID-19 pandemic and accompanied expanding EBITDA profit margins. However, sales and adjusted earnings per share figures fell short of analyst estimates, and the company reset some 2021 goals on higher spending anticipated to accommodate warehouse construction for a newly hatched supply agreement with Key Food Stores, a 300-store cooperative in New York.
Evidently fearful the benefits the wholesaler enjoyed in an extraordinary 2020 were winding down, investors largely abandoned UNFI stock, which was down by 15% following the newsy update. Its stock is up by about 85% year to date.
“With the strength we’ve shown during the last three quarters, the tremendous confidence we have in our company and our strong commitment to increasing shareholder value, it’s clear to us that the best days for UNFI lie ahead as we continue to build and optimize our DC network, expand our brands, win new business and migrate our business towards customer solutions and expand our fastest-growing segment, e-commerce,” Spinner said in a conference call reviewing results, according to a Sentieo transcript. “We believe the momentum from fiscal 2020 will continue as we grow sales and adjusted EBITDA in fiscal 2021 above and beyond our results from 2020, which were partially driven by COVID.”
For the quarter, which ended Oct. 31, sales grew 6% to $6.7 billion. The sales total reflected $3 billion in sales to chain stores (a 5% increase); $1.7 billion in sales to independent retailers (7.4%) and $1.2 billion in sales to Whole Foods Markets, which UNFI calls the “supernatural” channel and grew by 9.3%.
The fate of UNFI’s relationship with Amazon-owned Whole Foods—often seen as a way for traders to affordably “play” the high-profile retailer, and for a time, an outsized influence on UNFI—has long been a source of investor angst, but Spinner said the company expects early next year to announce an extension of their current supply contract, which is now set to expire in October 2025.
Spinner said the sides would normally have been in talks on an extension already but with each focused on COVID this year, that’s only happening now. “I have every expectation and they have every expectation that this is going to get done in the first part of next year,” Spinner said.
Spinner, who announced plans to retire after 12 years at UNFI in September, also said he hoped to name his successor early next year. Working with a succession committee of the UNFI board, he said it “has identified exemplary talent both inside and outside of UNFI.”
With the work of the Supervalu integration now largely behind it, Spinner said UNFI would launch a new round of productivity initiatives known as Value Path. Spinner described the initiative as a “holistic approach to driving more value throughout our business, including across key elements of pricing, procurement, operations and administrative functions.” He said he expects this would drive between $70 million and $100 million in savings by the end of fiscal 2023.
UNFI is also turning attention again to winning new business. The Key Food account, announced in October, will add an estimated $1 billion in new sales a year for 10 years. The 300 stores in that cooperative will be serviced from a new distribution facility now under construction in Allentown, Pa., which Spinner said could also service additional customers in metro New York.
UNFI President Chris Testa, speaking in the call, credited that customer win—from rival C&S Wholesale—to UNFI having demonstrated its ability to service customers during the pandemic.
Investment to build the Allentown facility will increase the company’s capital expenditure budget in the fiscal year by about $50 million to a range now expected between $250 million and $300 million. It will also cut into the rate at which UNFI had planned to reduce debts by about the same amount.
“The capital we are investing in our Allentown facility will improve our competitive position in the Northeast, allow us to further build market share in Metro New York and position us for further growth beyond the incremental Key Food revenue of $1 billion per year. And while it will reduce our net debt reduction outlook for this fiscal year, we believe it will lead to higher levels of free cash flow in the future,” Chief Financial Officer John Howard said.