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UNFI’s Q3 Sales Growth Highlights Rebound

PROVIDENCE, R.I. United Natural Foods Inc. here last week posted a quarterly sales increase of nearly 11%, exceeding earlier estimates and providing more evidence of a sustained rebound in food sales at least among some sectors of the economy. The natural and organics distributor, whose results are tethered to that of its largest customer, Whole Foods Market, also reported increases in its sales to

PROVIDENCE, R.I. — United Natural Foods Inc. here last week posted a quarterly sales increase of nearly 11%, exceeding earlier estimates and providing more evidence of a sustained rebound in food sales — at least among some sectors of the economy.

The natural and organics distributor, whose results are tethered to that of its largest customer, Whole Foods Market, also reported increases in its sales to conventional supermarkets and independent food retailers in the fiscal third quarter, which ended May 1.

“It's a critical signpost that spending is bouncing back in the grocery sector,” Gary Giblen, an analyst with Quint-Miller & Co., New York, told SN following the announcement of UNFI's results for the third quarter, which ended May 1. “We know that Whole Foods is doing well, but sales to supermarkets and independent natural food stores also accelerated considerably, and that's news.”

UNFI — and many of its customers — experienced sluggish sales for much of 2009. But in a conference call discussing results last week, Steven L. Spinner, president and chief executive officer, said the company had seen a “consistent improvement in our top-line number since January of this year, and the trend has continued through May.”

Sales to independent retailers — which combined provide about 40% of UNFI's business — increased 6.9% during the quarter, nearly tripling from the previous quarter. “The independents in the third quarter really turned the corner,” Spinner said.

Giblen said he considered this significant because it indicated that shoppers were again “trading up” to independents, which he said tend to have higher prices. “Independents had been down for the count during the economic softness,” he said. “I tend not to be too optimistic and don't want to get carried away, but I think that was an important litmus test of grocery spending. It looks like there's a substantial resurgence in discretionary spending for what I call small-ticket indulgences.”

Meredith Adler, an analyst with Barclays Capital, New York, said UNFI's results could point to a return to a “bifurcated” spending between shoppers of different economic strata.

“The evidence we've seen for the last six months shows that we're back to a bifurcation between people who have income — people who haven't lost their jobs and have income in the stock market — and people who are still hurting,” Adler told SN. “I would guess a little more of [United Natural's customers'] business is from people who were doing OK.”

For the quarter, UNFI said net sales increased 10.8% to $985.7 million. The sales results prompted company officials to increase sales guidance for the fiscal year to 6.5% to 7.5% growth, or around $3.7 billion. Earlier estimates called for about $3.6 billion in annual sales. Net income of $19.5 million increased 15% from the same period last year, reflecting better expense controls despite decreases in gross margins caused by a shift of sales toward conventional supermarkets and supernaturals, which tend to provide lower margins, officials said.

Disinflation — which eliminated the opportunity to “forward buy” — and a pick-up in business reducing manufacturer discounts also acted to reduce quarterly margins, Spinner said. He added that he expected inflation would resume a typical 1% to 3% growth after being flat in the third quarter. Spinner said inflation in the same period last year was about 6%.

UNFI's sales in the supernatural channel, led by Whole Foods, saw revenues improve by 17.7% in the quarter and now account for 37% of the wholesaler's business.

United and Whole Foods jointly last week announced they have extended their distribution agreement for an additional seven years beyond the three remaining on their current deal. Under terms of the amended agreement, which would expire in September of 2020, UNFI will continue to serve as the primary wholesaler to Whole Foods in all regions where it currently serves as the primary distributor.

“Getting this deal done now allows UNFI to begin investing in the systems needed to support long-term growth,” Edward Aaron, an analyst for RBC Capital Markets, said in a research note. “It also prevents the type of overhang on the stock experienced in 2005 when the prior agreement was expiring.”

Spinner said that warehouse productivity initiatives — set to kick off this summer — would more than make up for margin deterioration from a greater percentage of sales in the supernatural and conventional channels.

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