United Natural Foods, Inc. (NYSE: UNFI) (the “Company” or “UNFI”) today reported financial results for the second quarter of fiscal 2020 (13 weeks) ended February 1, 2020.
Second Quarter Fiscal 2020 Highlights
- Net Sales of $6.14 billion compared to $6.15 billion in last year’s fiscal second quarter
- Total outstanding net debt reduced by $149 million compared to the first quarter of fiscal 2020
- Gross margin rate increased compared to last year’s fiscal second quarter
- Second quarter GAAP and adjusted results include charges of $0.44 per diluted share associated with three customer bankruptcies
- Update to fiscal 2020 guidance
“UNFI continues to evolve as the industry leader providing retailers with today’s most sought-after products,” said Steven L. Spinner, Chairman and Chief Executive Officer. “Despite considerable industry headwinds, I’m encouraged by our underlying performance and the momentum that is building within our business. Prior to charges associated with the three customer bankruptcies that impacted the quarter, we grew Adjusted EBITDA by low double digits, and we remain optimistic as we move into the second half of our fiscal year and confident in UNFI’s long-term growth prospects.”
| 13-Week Period Ended | ||||||
| ($ in millions, except per share data) | February 1, 2020 | January 26, 2019 | % Change | |||
| Net Sales | $ | 6,138 | $ | 6,149 | (0.2) | % |
| Supermarkets channel(1) | $ | 3,879 | $ | 3,928 | (1.2) | % |
| Supernatural channel | $ | 1,210 | $ | 1,100 | 10.0 | % |
| Independents channel(1) | $ | 631 | $ | 675 | (6.5) | % |
| Other channel(1) | $ | 418 | $ | 446 | (6.3) | % |
| Net Loss | $ | (31) | $ | (342) | ||
| Adjusted EBITDA(2) | $ | 131 | $ | 143 | ||
| Net Loss Per Diluted Share (EPS) | $ | (0.57) | $ | (6.72) | ||
| Adjusted Earnings Per Diluted Share (EPS)(2) | $ | 0.32 | $ | 0.44 | ||
| (1) | During the first quarter of fiscal 2020, the presentation of net sales by customer channel was adjusted to reflect reclassification of customer types resulting from management’s determination that a customer serviced by both Supervalu and legacy UNFI should be classified as a Supermarket customer given that customer’s operations. During the second quarter of fiscal 2020, the presentation of net sales by customer channel was adjusted to reflect conventional military sales within Other instead of Independents based on management’s determination to better reflect the focus of its ongoing business and the definition of customer channels. There was no impact to the Condensed Consolidated Statements of Income as a result of the reclassification of customer types. As a result of these adjustments, net sales to the Company’s Supermarkets channel for the second quarter of fiscal 2019 increased approximately $26 million compared to the previously reported amounts, while net sales to the Other channel for the second quarter of fiscal 2019 increased $109 million compared to previously reported amounts. Net sales to the Company’s Independents channel for the second quarter of fiscal 2019 decreased $135 million compared to the previously reported amounts. In addition, net sales to the Company’s Other channel for the first quarter of fiscal 2020 increased $90 million compared to the previously reported amounts, with an offsetting elimination to the Independents channel. |
| (2) | Please refer to the tables in this press release for a reconciliation of these non-GAAP financial measures to the most directly comparable financial measure calculated in accordance with U.S. GAAP. |
Second Quarter Fiscal 2020 Summary
Net sales from continuing operations benefited from continued growth in our Supernatural channel, which was offset by sales declines in other customer channels.
Gross margin for the second quarter of fiscal 2020 was 12.63% of net sales compared to 12.39% of net sales for the second quarter of fiscal 2019, which included an $8.6 million, or 0.14% of net sales, inventory fair value adjustment related to the Supervalu acquisition. When excluding this charge, gross margin in the second quarter of fiscal 2019 was 12.53% of net sales. The increase in gross margin rate was primarily driven by lower inbound freight expense. Included in gross margin for the second quarter of fiscal 2020 was inventory shrink expense of approximately $4.2 million, or 0.07% of net sales, associated with customer bankruptcies.
Operating expenses in the second quarter of fiscal 2020 were $750.8 million, or 12.23% of net sales, compared to $751.9 million, also 12.23% of net sales, for the second quarter of fiscal 2019. Operating expenses in the second quarter of fiscal 2020 and fiscal 2019, as a percent of net sales, were approximately equal as cost savings in the second quarter of fiscal 2020 were offset by approximately $28.9 million, or 0.47% of net sales, of bad debt expense associated with customer bankruptcies.
Restructuring, acquisition and integration related expenses in the second quarter of fiscal 2020 were $29.7 million, including costs and charges related to the disposal of existing retail and surplus real estate, distribution network consolidation, and employee-related costs, compared to $47.1 million in the second quarter of fiscal 2019.
Operating (loss) income in the second quarter of fiscal 2020 was $(5.1) million and included expense of $33.1 million associated with customer bankruptcies and $29.7 million of restructuring, acquisition and integration related expenses. When excluding the restructuring, acquisition and integration expenses, operating income in the second quarter of fiscal 2020 was $24.6 million, or 0.40% of net sales. Operating loss in the second quarter of fiscal 2019 was $(408.1) million and included a goodwill impairment charge of $370.9 million, restructuring, acquisition, and integration related expenses of $47.1 million, and a fair value inventory adjustment charge associated with the purchase of SUPERVALU of $8.6 million. When excluding these items, operating income for the second quarter of fiscal 2019 was $18.5 million, or 0.30% of net sales. The increase in adjusted operating income, as a percent of net sales, was driven by higher gross margins.
Interest expense, net for the second quarter of fiscal 2020 was $48.6 million. Interest expense, net for the second quarter of fiscal 2019 was $58.7 million and included expense of $2.5 million related to interest on the then-outstanding SUPERVALU senior notes and $1.0 million of unamortized debt issuance costs for certain term loan prepayments made in the second quarter of fiscal 2019 with asset sale proceeds. When excluding these amounts, interest expense, net was $55.2 million in the second quarter of fiscal 2019. The decrease in interest expense, net was driven by lower amounts of outstanding debt and lower average interest rates.
Effective tax rate for continuing operations for the second quarter of fiscal 2020 was a benefit of 35.5% compared to a benefit of 20.2% for the second quarter of fiscal 2019. The second quarter effective tax rate for both fiscal years reflects a tax benefit based on consolidated pre-tax loss from continuing operations. The change in the effective tax rate for the quarter was primarily driven by a tax benefit on the goodwill impairment charge in the second quarter of fiscal 2019 which did not recur in the second quarter of fiscal 2020.
Net loss for the second quarter of fiscal 2020 was $(30.7) million compared to $(341.7) million for the second quarter of fiscal 2019. The second quarter of fiscal 2019 included a $370.9 million pre-tax goodwill impairment charge as well as $17.4 million in additional restructuring, acquisition and integration related expenses compared to the second quarter of fiscal 2020.
Net (loss) income per diluted share (EPS) was $(0.57) for the second quarter of fiscal 2020 compared to $(6.72) for the second quarter of fiscal 2019. Adjusted EPS was $0.32 for the second quarter of fiscal 2020 compared to adjusted EPS of $0.44 in the second quarter of fiscal 2019, reflecting customer bankruptcy charges and lower net income from discontinued operations in the second quarter of fiscal 2020. The income tax rate used for adjusted EPS represents a forecasted rate for the full year. Beginning in fiscal 2020, in calculating adjusted EPS, the Company uses an adjusted effective tax rate. See footnotes in the reconciliation tables below for more information.
Adjusted EBITDA for the second quarter of fiscal 2020 was $131.1 million compared to $142.6 million for the second quarter of fiscal 2019. Adjusted EBITDA for the second quarter of fiscal 2020 included expense of $33.1 million associated with customer bankruptcies.
Total Outstanding Debt, net of cash, decreased $149 million in the second quarter of fiscal 2020 (compared to the first quarter of fiscal 2020) driven by an expected decrease in net working capital following the holiday selling period.
Fiscal 2020 Outlook(1)
Fiscal 2020 guidance for net sales is unchanged from previously provided guidance. Fiscal 2020 guidance for Net Loss, EPS, Adjusted EPS and Adjusted EBITDA has been changed to reflect charges taken in the second quarter associated with customer bankruptcy filings.
| Fiscal Year Ending August 1, 2020 | |
| Net Sales ($ in billions) | $23.5 – $24.3 |
| Net Loss ($ in millions) | $(395) – $(363) |
| Loss Per Share (EPS) | $(7.39) – $(6.79) |
| Adjusted Earnings Per Diluted Share (EPS) (2) (3) | $0.85 – $1.45 |
| Adjusted EBITDA(3) ($ in millions) | $520 – $560 |
| (1) | The outlook provided above is for fiscal 2020. This outlook is forward-looking, is based on management’s current estimates and expectations and is subject to a number of risks, including many that are outside of management’s control. See cautionary language below. |
| (2) | Beginning with periods ending after August 3, 2019, the Company is using an adjusted effective tax rate in calculating Adjusted EPS. The adjusted effective tax rate will be calculated based on adjusted net income before tax. It also excludes the potential impact of changes to uncertain tax positions, valuation allowances, stock compensation accounting (ASU 2016-09) and discrete GAAP tax items which could impact the comparability of the operational effective tax rate. The Company believes using this adjusted effective tax rate will provide better consistency across the interim reporting periods since each of these discrete items can cause volatility in the GAAP tax rate that is not indicative of the underlying ongoing operations of the Company. By providing this non-GAAP measure, management intends to provide investors with a meaningful, consistent comparison of the Company’s effective tax rate on ongoing operations. |
| (3) | Please refer to the tables in this press release for a reconciliation of these non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with GAAP. |
Conference Call and Webcast
The Company’s second quarter fiscal 2020 conference call and audio webcast will be held today, Wednesday, March 11, 2020 at 8:30 a.m. ET. A webcast of the conference call (and supplemental materials) will be available to the public, on a listen only basis, via the internet at the Investors section of the Company’s website www.unfi.com. An online archive of the webcast (and supplemental materials) will be available for 120 days.
