UNFI Experiences Higher Customer Demand in Q3

For its 13-week third quarter of fiscal 2020 ended May 2, grocery distributor United Natural Foods Inc. reported a net sales increase of 12% to $6.67 billion; compared with $5.96 billion in the year-ago period. The company attributed the increase to strong customer demand driven by its responses to COVID-19, including cross selling, partly offset by the impact from customer bankruptcies that occurred in the second quarter. Meanwhile, Q3 fiscal 2020 net income rose 54% to $88 million, compared to $57.1 million for the third quarter of fiscal 2019.

“UNFI’s ability to successfully manage the strong increase in customer demand driven by the COVID-19 pandemic is a testament to the dedication of our associates, our strong industry position and the critical role we play in the North American food supply chain,” said Steven L. Spinner, the company’s chairman and CEO, who discussed its Q3 2020 preliminary results last month. “We expect elevated consumer demand for our wide variety of natural, conventional and fresh perimeter products, along with our ongoing synergy and integration initiatives, to result in a strong finish to the fiscal year. I am so proud of our team of frontline associates who continue to amaze us with their commitment to excellence. Our first priority will continue to be their safety.”

UNFI’s Q3 fiscal 2020 adjusted EBITDA grew 32% to $222 million, compared with $168.2 million last year, reflecting higher net sales and the leveraging of fixed costs, as well as integration synergies, which were partly offset by a lower gross margin rate and incremental costs related to COVID-19.

The company's net income per diluted share (EPS) was $1.60 for Q3 fiscal 2020, versus $1.12 for the year-ago period, while Q3 fiscal 2020 adjusted EPS was $1.40, compared with 61 cents in the third quarter of fiscal 2019, reflecting higher net sales and the leveraging of fixed costs, partly offset by a lower gross margin rate and incremental COVID-19 costs.

During the third quarter of fiscal 2020, UNFI’s net debt declined by $302 million versus the second quarter of fiscal 2020, driven by net cash provided by operations, including the benefit of lower levels of working capital, partly offset by the addition of an approximately $94 million finance lease associated with a purchase option exercised for a distribution center.

The company’s gross margin rate for Q3 fiscal 2020 was 12.85% of net sales, versus 13.22% of net sales last year, primarily due to a mix shift toward lower-margin conventional products and lower levels of vendor funding, partly offset by lower levels of inventory shrink. UNFI’s Q3 fiscal 2020 also saw a tax benefit, resulting from the Coronavirus Aid, Relief and Economic Security (CARES) Act, which allows net operating losses to be carried back into tax years with higher statutory rates.

The company also said that it expects to continue to operate its Cub Foods banner and some of its Shoppers Food Warehouse stores for up to 24 months, “given the state of the M&A markets,” as Spinner noted during a June 10 earnings call.

“As an interim step, we're in the process of separating Cubs 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,” said Spinner on the call. “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 when we market these banners for sale.”

Spinner added that the company had “also decided to take a pause on the sale leaseback of Cub's owned properties. 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.”

Observed UNFI CFO John Howard: “We're pleased with the cash being generated by Cub and happy to have the flexibility to sell Cub's owned real estate at a more advantageous time.”

Providence, Rhode Island-based UNFI delivers a wide variety of products to customer locations throughout North America, including natural product superstores, independent retailers, conventional supermarket chains, ecommerce retailers, and foodservice customers. The largest publicly traded grocery distributor in America, UNFI is No. 61 on The PG 100, Progressive Grocer’s list of the top food retailers in North America.