UNFI Q4 Profits Dip on Mix, Freight Costs

United Natural Foods Inc. said continued growth of sales to Whole Foods Markets lifted revenues but ate into the distributor's profits in its fiscal fourth quarter.

Providence, R.I.-based UNFI said the disproportionate sales growth of what it calls the “supernatural” channel led to decreased margins and, combined with higher-than-expected inbound freight costs, triggered a 15.6% decline in net income in the quarter despite a 10.7% overall growth in sales. Margins in the quarter tumbled to 14.5% of sales from 15.75% in the same period a year ago. For the period, which ended July 28, UNFI earned $32.8 million on sales of $2.6 billion.

Earnings-per-share of 76 cents came in below Wall Street expectations of 85 cents, and stock in the company was down by more than 10% in after-market trading.

"We continued to deliver solid top-line growth across our customer channels, demonstrating sustained strong demand for UNFI’s product assortment and services," said Steven L. Spinner, chairman and CEO, in a statement. "On the bottom line, our results reflected the impact of customer mix shift and higher-than-anticipated freight costs, while improvement in our working capital has resulted in record free cash flow for the quarter."

During the quarter, UNFI agreed to acquire conventional counterpart Supervalu in a deal worth $2.9 billion.

Related:UNFI to Acquire Supervalu in $2.9B Deal

“We are on track to close the Supervalu transaction in the fourth quarter of calendar 2018, and our teams are hard at work planning for the integration to capture the significant synergies and strategic benefits of this transformative combination, positioning our company for growth and value creation,” Spinner said.

Sales in the supernatural category in the quarter grew by 27.5%, outpacing more profitable sales to independent natural food stores (which grew by 5.7%) and conventional supermarkets (which saw 1.1% sales growth). The sales increase to Whole Foods reflects an increase in the breadth of items sold to the retailer and not necessarily the retailer’s sales, although they too have presumably grown under its new corporate parent, Amazon, which took over a year ago.

For the year, UNFI’s sales to Whole Foods grew by $662 million, or 21.4%.

UNFI’s sales for the fiscal year of $10.2 billion came in at the low end of the company’s guidance, and EPS of $3.26 was below the expected range.

UNFI said it expected sales in fiscal 2019 to grow 8.6% to 10.5%, excluding the effects of the Supervalu acquisition.