PROVIDENCE, R.I. — Independent customers of United Natural Foods Inc. here have experienced sales growth in recent months, the natural and organic products distributor said.
In a conference call with analysts discussing results for its fiscal second quarter, UNFI said its sales volume to independents rose by 7.9% in the quarter, excluding the impact of acquisitions.
“It's consumer demand, No. 1,” said Steven L. Spinner, chief executive officer, in explaining the growth among smaller operators. “We think that there's just a greater confidence on the part of the consumers towards eating organic for a variety of reasons, including confidence in the organic label, and the healthy considerations associated with what organic brings.”
In addition, he said some moves away from organic offerings by some mass retailers “may be driving some of the traffic into the independent retailers.”
All of UNFI's customer segments experienced sales growth in the quarter, with the supernatural channel up 15.6%, supermarkets up 21.8% and foodservice sales up 26%.
During the call, Spinner also confirmed that the company was in discussions to take on Pleasanton, Calif.-based Safeway as a customer. Reports had emerged earlier this year that UNFI might be angling for that business, which is currently handled by Kehe Foods/Tree of Life and DPI Specialty Foods, Evanston, Ill.
Safeway's contracts are expiring this summer, and could add as much as $250 million to $300 million in sales to United Natural's top line, according to a report issued earlier this year by Edward Aaron, a Denver-based analyst with RBC Capital Markets. After the quarterly conference call, Aaron said in a research note that he “continues to expect UNFI to take over Safeway distribution in September.”
For the quarter, which ended Jan. 29, net income at UNFI was up 19.6%, to $18.7 million, on a sales gain of 24.1%, to $1.11 billion, compared with year-ago results.
Gross margin was 17.8% for the second quarter of fiscal 2011, a 45 basis-point decline from the first quarter, which the company attributed to a shift in its product mix.
The company raised its sales guidance for the year to a range of $4.4 billion to $4.5 billion, up from previous guidance of $4.35 billion to $4.45 billion.
Analysts were happy with the company's revenue growth in the quarter, but noted that margins were under pressure.
“Revenue growth continues to outpace expectations, but margin pressure may hold back earnings growth over the next several quarters as the company works to improve efficiencies from its new DC and warehouse systems,” said Scott Mushkin, an analyst with Jeffries & Co., New York.
Spinner said the company would continue to experience pressure on gross margins as it expands in the conventional supermarket and supernatural channels.
“We'll continue to offset the gross margin impact by generating efficiencies and improvements in operating expenses, as these customers have a lower cost to serve, although we may not be able to take costs out at the same pace as the gross margin decline over the next few quarters,” he explained.