UNFI sees momentum building, despite year-to-year sales drop in Q3

Because 2020's sales were so extremely unusual, United Natural Foods Inc. (UNFI) knew it would not surpass those figures, but the company was still bullish on its third quarter earnings — the first quarter to lap last year’s pandemic-spurred sales — particularly when compared to fiscal 2019.

UNFI reported net sales of $6.62 billion in Q3, which ended May 1, a drop of 5.9% year over year but an increase of 6.7% over the third quarter of 2019.

"We calculated this by adding the year-over-year growth rate to the prior year-over-year growth rate, and we believe it to be an appropriate way to view sales this quarter, given the unprecedented activity in last year's third quarter," said president Chris Testa in an earnings call with analysts Wednesday morning.

"We're very pleased with our strong performance this quarter, which maintains the momentum building across our business," CEO Stephen Spinner added.

In other Q3 highlights, UNFI reported:

• Net income of $49 million, a decrease of approximately $40 million.

• Adjusted EBITDA of $179 million, a decrease of 19.2%.

• Earnings per diluted share (EPS) of $0.80, a decrease of 50.0%.

• Adjusted EPS of $0.94, a decrease of 29.3%.

• Net debt reduction of $62 million bringing fiscal year-to-date total to $175 million.

Related:UNFI launches online wholesale digital marketplace

By channel, chains saw sales decrease 5.6% from Q3 2020, and increase 5.4% over two years; independent retailers saw a decrease of 11.4% and an increase of 3.8% over two years; and supernatural (Walmart) saw an increase of 0.6% from last year and a 16.6% increase over two years. UNFI's remaining retail chains, Cub and Shoppers, saw a 9.3% decrease from Q3 2020 and a 14.9% increase over two years.

For the first three quarters of fiscal 2021, UNFI reported net sales of $20.2 billion and net income of $106.5 million.

The quarterly results were in line with the company's internal expectations, Spinner said. He expects it will meet its full-year fiscal 2021 guidance as well, which projects net sales of $27 billion.

Also on the call, Spinner (left) noted that the next CEO would not be named "before or at Investor Day," scheduled for June 24. Spinner announced at the end of September that he would step down from his position on July 31, the end of the company's fiscal year. However, the Board of Directors asked him to stay longer, as COVID complicated the search process, he said in March.

He will continue to serve as UNFI's executive chairman until further notice.

Working to satisfy associates, reduce turnover

While stories abound regarding a labor shortage as the country comes out of the COVID-19 pandemic and resulting economic downturn, UNFI has been raising wages and improving working conditions to satisfy its associates, company officials said during the call.

Related:UNFI to see growth with unique mix of brands, services, says CEO Steve Spinner

“One of our most important core beliefs has always been to do the right thing, which includes continuously and proactively looking for ways to keep UNFI as an employer of choice,” said Spinner. “This includes looking at ways to create better work-life balance; our commitment to diversity and inclusion; and our relentless focus on safety.”

COO Eric Dorne said the company also increased hiring to manage overtime and reduce turnover.

Over the past 12 months, UNFI adjusted wages in many markets, which led to improved productivity, decreased overtime and less turnover — all of which offset the cost of the pay increases, Spinner said.

“In addition, we've continuously been investing in automation to improve throughput and order accuracy while easing the local challenges around available workforce,” he said.

When asked if the labor shortage that UNFI has seen is a result of high unemployment benefits, CFO John Howard opined that it is not.

"Our drivers are sophisticated, they are knowledgeable and they are working. I think we're in a temporary period where the demand for freight is outpacing the ability of the industry to move the freight," Howard said. "But I do feel like it's temporary. Once we get back to stability, economically people are back at work and the pandemic is predominantly behind us, I think this is all going to stabilize."

As an example of UNFI's willingness to accommodate employees' needs, Spinner offered some details about the company's not-yet-open Allentown, Pa., distribution center. The facility, which Spinner called a lifestyle center, will have sophisticated technology regarding flexible work hours and sharing shifts.

Helping customers be successful

Since it purchased Supervalu — a national distributor of conventional foods and the owner of 3,000 retailer stores — in 2018, UNFI has offered its customers services such as payroll, credit-card processing and analytics.

“Our services lower their expense structure and makes running their business easier,” Spinner said. “And our innovation is continually looking forward and asking the critical questions of continually looking forward and asking the critical questions of 'What's next,' followed by, 'What will UNFI do to bring it to our customers in the easiest possible way?'”

Testa (left) said the company offers more than 150 services that help customers save time and money, as well as drive revenue. In the past six months, it has installed 148 payment systems. One multi-store customer is saving more than $500,000 a year with that service, he said.

UNFI also provides e-commerce services for its customers. An additional 215 stores have joined the platform in the past year, and 120 more are in the process of joining, Testa said. The service allows customers to offer consumers online ordering, click-and-collect and delivery.

UNFI continues to expand its line of private label products as well, he said, including more than 100 new products in 15 categories this year under the Field Day brand.

"Top-selling SKUs include functional beverages, personal care items and pantry supplies. At the same time, our Essential Every Day brand has record sales in the quarter with international customers as our Brand Plus team is aggressively expanding distribution in Central and South America," Testa said.

In operations, the distributor is optimizing its supply chain and expanding its network of distribution centers.

"For the first time this year, our outbound fill rate improved year-over-year as we continue to work with suppliers on the journey back to pre-COVID service levels," he said.

"Our associates have done an amazing job through this pandemic getting product to our customers on time and in a safe, professional manner. We're operating a high level and we have every reason to believe our momentum will continue into next fiscal year and beyond," Testa noted.