Surging demand hoists Q3 sales at United Natural Foods

United Natural Foods Inc. saw revenue rise by double digits in its fiscal 2018 third quarter, fueled by sales to its largest retail customer, Whole Foods Market.

The natural, organic and specialty products distributor also beat Wall Street’s earnings-per-share forecast by 11 cents and raised its full-year EPS guidance.

For the quarter ended April 28, sales climbed 11.8% to $2.65 billion from $2.37 billion a year earlier, driven by increased demand. Operating income for the third quarter came in at nearly $82.2 million, up 26.5%.

“We continue to see strong top-line growth across all customer channels. These results demonstrate that demand for better-for-you products and for United Natural Foods services continues to be strong,” Chairman and CEO Steven Spinner said late Wednesday in a conference call with analysts. “It's important to note that we are maintaining this growth, which does not include benefit from acquisitions, despite low inflationary environment.”

By customer channel, sales surged 24.3% to $992 million in the supernatural chains segment, which consists of Whole Foods, acquired last August by Amazon.com Inc. Sales to conventional supermarkets rose 3.7% to $718 million, while sales to independent natural product retailers were up 6.1% to $664 million.

Sales in United’s “Other” channel — which includes foodservice, branded product lines, manufacturing, the Earth Origins retail business and the e-commerce division — gained 8.3% year over year to $275 million.

United’s e-commerce business encompasses delivery to e-commerce and secondary e-commerce providers, to consumers for brick-and-mortar locations “looking for endless aisle fulfillment” and to alternative channels “that want our unique assortment through our Honest Green easy options website,” according to Spinner.

“We remain focused on growing our e-commerce business,” he told analysts. “During the third quarter, we activated e-commerce fulfillment from our Midwest facility located in Racine, Wis. United Natural Foods now provides e-commerce solutions from five facilities, three being grocery warehouses, which give us the capability to meet the delivery turnaround expectations of e-commerce customers. In addition, our unfieasyoptions.com B-to-B platform has seen double-digit growth, thanks to the development of curated assortments and increased traffic to the site overall.”

Net income in the third quarter jumped nearly 42%, rising to $51.9 million ($1.02 per diluted share) from $36.6 million (72 cents per diluted share) a year ago. Adjusted EPS (diluted) was $1.04, compared with 77 cents in the prior-year period.

Analysts, on average, had projected adjusted EPS of 93 cents, with estimates ranging from a low of 91 cents to a high of 97 cents, according to Thomson Reuters.

Adjusted EBITDA (earnings before taxes, depreciation and amortization) totaled about $104 million, up 15.1% from $90.4 million a year earlier.

Gross margin was squeezed in the third quarter, down 5 basis points to 15.41%. United said the decline stems mainly from a shift in customer mix — with sales growth from lower-margin customers outpacing growth with other customers — plans increased inbound freight costs. Also reflected in the gross margin was a $20.9 million positive impact from an accounting change, as the company revised its calculation for accrual of inventory purchases.

“Looking forward to the remainder of fiscal 2018, we expect our growth to continue, driven by demand for better-for-you products,” Spinner said in the call. “We've raised our guidance on the top line as well as the bottom line to reflect this improved outlook.”

United lifted its fiscal 2018 EPS projection to between $3.39 and $3.44 on a GAAP basis and between $3.18 and $3.23 on an adjusted basis, with both estimates raised on the high and low ends. Net sales are pegged at $10.23 billion to $10.28 billion, reflecting year-over-year growth of 10.3% to 10.8% versus the previous forecast of 8% to 9.5%.

For the full year, analysts’ consensus forecast is for adjusted EPS of $3.10, with estimates running from a low of $3.06 to a high of $3.15, according to Thomson Financial.

Spinner told analysts the business environment remains challenging, given the rapid pace of change and pricing pressure in the retail arena as well as sharper demands from customers.

“Consumers are demanding more, shopping in various ways and continuously changing their habits. They want variety, specific ingredient attributes, exclusive brands, fresh products, private label, brick-and-mortar retailer — retail and e-commerce options, among other things. We play a role in each of these purchase options and have value merchandising, data insights and category management to pursue high-growth opportunities,” he explained.

United has “considerable runway” in the channel and is seeing high growth in better-for-you products for conventional and mass grocery, Spinner noted.

“Going forward, we will focus on our building out the store strategy, increasing our exposure to fresh categories of products, and increasing our new market share with existing customers and new customers,” he said. “Importantly, we remain committed to supporting our independent customers in this competitive environment. Field Day, our private label specifically developed a few years ago for the independent channel, continues to grow significantly and remains one of the top brands in the natural channel.”