Expenses, Slow Growth Hit United Natural's Bottom Line

MARK HAMSTRA

DAYVILLE, Conn. — United Natural Foods here said last week that its net income for the second fiscal quarter was a little less than analysts expected, which the company attributed to slower than anticipated sales growth and some one-time charges.

The natural- and organic-product distributor reported net income for the three-month second quarter, which ended Jan. 27, of $10.9 million, up 2.5% over year-ago results. Sales for the period were $668.5 million, up 11.2%.

“While the quarter came in at the lower end of our 11% to 15% [sales growth] guidance for the year, we remain optimistic of stronger sales trends in the last half of fiscal '07,” said Michael S. Funk, president and chief executive officer, in a conference call with analysts discussing the results.

The company said its distribution business to traditional supermarkets, which account for about 15% of its volume, was up 27.5% for the quarter, but the rate of sales growth to independents, which account for 43% of volume, slowed to 7.8%. Sales to the “supernatural” chains, which include Whole Foods and Wild Oats, grew at a 9.2% rate for the quarter. They account for about 36% of the distributor's volume.

In response to a question, Funk said the growth in the supermarket channel was coming both from strong comps at mature natural/organic product sets and from the addition of new sets. He also said the decline in the pace of growth among independents was something the company had observed during “the last several quarters,” but he added that he didn't think the slowdown would continue.

Through the second half of the year, United Natural forecast sales growth in the 13% to 15% range, which it expects to come primarily from Whole Foods and Wild Oats locations.

The company said it recently began transitioning to be the major supplier for Whole Foods in Southern California from a facility located in Fontana, Calif., which it said would add $100 million to its sales volume.

The company also said it was planning to expand in the Pacific Northwest with the scheduled opening of a 237,000-square-foot distribution center in Ridgefield, Wash. The center, which will serve as a hub for customers in Portland, Ore., and other areas in the region, is scheduled to come online late this summer.

Unified said it had some cost pressures in the quarter from the start-up of the Whole Foods business at the Fontana facility, and it also incurred some one-time charges related to the sale of two other facilities in Southern California. Adjusting for those write-downs, plus the write-down associated with a facility in Minnesota, the company said its net income for the second quarter would have been $12.7 million, compared with net income of $10.8 million, excluding special items, in the second quarter of a year ago.

In an analyst report, Goldman Sachs said the company did a good job of keeping expenses in check in the quarter, but cautioned that such controls were not likely to be sustainable.

“Although second-quarter results were decent, year-over-year top-line growth continues to moderate, and the [bottom line] is becoming increasingly reliant on exceptional cost control, which we view as unsustainable,” the firm said. “Simply put, a growth company, even in the distribution business, cannot keep expenses growing only 4%.”