Cub Foods, Shoppers stores to be spun off from UNFI

United Natural Foods Inc. (UNFI) plans to spin off its Cub Foods and Shoppers supermarkets as a stand-alone unit, following a decision to hold off on the pending sale of the stores amid the coronavirus crisis.

UNFI picked up Cub Foods and Shoppers with its $2.9 billion acquisition of Supervalu, which closed in October 2018. Supervalu already had been divesting its retail grocery stores, and the process continued under UNFI as the two companies integrated. Last month, however, UNFI said it would put the sale of the chains on hold for 12 to 18 months so the stores could continue providing customers with groceries during the COVID-19 pandemic.

In a conference call with analysts on Wednesday, UNFI Chairman and CEO Steven Spinner said plans now call for Cub and Shoppers to be split from the company into their own operating unit, and the sale of the stores won’t be for another 24 months.

“Last month, given the state of the M&A markets, I said we’ll likely be running some Shoppers stores for an additional period of time and that same thinking applies to Cub. As an interim step, we’re in the process of separating Cub from UNFI, which means Cub will operate more as a freestanding entity than it does today, with its own dedicated resources once the separation is complete,” Spinner said in the call.

Related:UNFI CEO: Recession, new consumer habits could last 24 months

“Historically, we’ve supported Cub with shared resources that include associates splitting their time between Cub and other parts of the business. This should accelerate the diligence period and allow for a more streamlined process as we market these banners for sale. We’ve also decided to take a pause on the sale-leaseback of Cub’s owned properties,” he explained. “To maximize the value of the banner, including its owned real estate, we’ve pushed these potential transactions 24 or so months into the future.”

Shoppers currently operates 24 stores, mainly in the Washington, D.C., area. Plans call for Cub and Shoppers to shift from UNFI’s discontinued to continuing operations starting in the fourth quarter.

Currently, Cub’s retail network encompasses 52 wholly or majority-owned stores and 27 franchised or minority-owned stores in Minnesota, primarily in the Twin Cities market, and Illinois (one store). As of the end of UNFI’s fiscal 2020 third quarter on May 2, Shoppers had 24 stores, mainly in the Washington, D.C., area. Plans call for Cub and Shoppers to shift from UNFI’s discontinued to continuing operations starting in the fourth quarter. Combined sales are about $2 billion.

“The results reported in discontinued operations will only be for stores that have previously been disposed of or which we currently expect will be disposed of in the near future. What moves to continuing operations is the entire Cub banner, as well as those Shoppers stores that will run for up to 24 months,” UNFI Chief Financial Officer John Howard told analysts in the call, adding that the company will change the way it reports net sales. “Since we acquired Supervalu and its retail operations, we’ve only included wholesale sales to Cub as part of net sales. This was because our intention has always been to sell Cub with a supply agreement. In the fourth quarter, we will recast prior periods, whereby the wholesale sales to Cub and certain Shoppers [stores] will be eliminated. On a consolidated basis, we will now report the retail sales from these stores. The estimated impact of this change will increase [UNFI’s] total annual sales for fiscal 2020 by approximately $1.2 billion.”

Related:UNFI ‘working diligently’ to sell Cub Foods, Shoppers

According to Spinner, it could take up to a year for Cub/Shoppers to become a freestanding operation.

“We have a handful of Shoppers stores that have yet to be sold, but they will be sold. We’re just finishing up some of the work to do so. The rest of them will be kept and the operated underneath Cub. So Cub will actually provide the infrastructure,” he said. “We’re in the process of separating retail entirely from UNFI. Right now, it’s complicated, and we think it’s probably going to take a better part of nine to 12 months to fully separate the two companies.”

Responding to an analyst’s question, Spinner said investment in the stores will continue, including remodels and systems.

“We certainly have a cadence of store renovations that we will continue to do. We’re also investing in technology to update their platform, to give them better access to data, among other things,” he said. “So there is some nominal spending that’s going to take place in retail, certainly over the next two years until we sell it.”

Though the retail M&A environment has been poor, Spinner said, the strong performance of Cub and Shoppers and the stores’ value to customers during the pandemic played a key role in postponing their divestiture.

“When you look at the results of our retail banners, our teams have just done spectacular work. They’re an important part of the communities. The communities rely on them. They’re doing really well,” he told analysts. “We don’t want to own retail forever; we’ve said that publicly. But we just don’t feel like it’s the best interests of our shareholders — it’s just not the right time to do it. We’ll wait until there’s stability in the market and there’s demand for really healthy retailers, in the case of Cub, with No. 1 market share. Now, it’s not the right time to disturb the communities and everything that’s going on with the retailing of food.”

Most recently, in December, Lidl US agreed to acquire six Shoppers stores from UNFI, including five in Maryland and one in Virginia. That deal came just days after UNFI announced the sale of 13 of its then 43 Shoppers stores to three retail grocery operators.