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UNFI: Contracts with Amazon, Whole Foods in place until 2025

Executives report sales growth, financial details for fourth quarter, end of fiscal 2017

United Natural Foods Inc. executives didn’t hesitate Wednesday to share their excitement about Amazon’s acquisition of Whole Foods Market last month.

And they have good reason: Before the deal closed, the two retailers committed to continuing their current contracts with UNFI until 2025, said UNFI CFO Mike Zechmeister during the earnings call regarding the end of fiscal 2017.

“We feel terrific about the combination. We feel terrific about the relationship we have with both companies. And we think they’re going to do terrific things. We’re glad to be a part of it,” Zechmeister said. “We’ve got a lot of scale across a lot of products, and a lot of suppliers that, quite frankly, is hard to replicate,” he said later in the call.

Noting that mergers and acquisitions continue to shape the food industry, UNFI Chairman and CEO Steven L. Spinner shared Zechmeister’s optimism about the $13.7 billion deal.

“Amazon and Whole Foods are both incredible brands. We believe UNFI is well-positioned to service them … through our network of distribution centers, our logistics capabilities and our breadth of differentiated and unique product offerings,” Spinner said.

Spinner and Zechmeister also reported positive news on all fronts for both the fourth quarter and the fiscal year, which ended July 29.

Net sales during the fourth quarter were $2.34 billion, a 5.7 percent increase over the fourth quarter of 2016, the company announced. For the fiscal year, net sales increase 9.5 percent, to $9.27 billion, from the previous year. Acquisitions made in 2016 positively affected 2017’s sales, according to the company.

“We had incredible success in getting considerably more synergy out of several of the acquisitions than we initially planned. That really came as a result of very careful integration planning and execution,” Zechmeister said.

For the fourth quarter, the gross margin was 15.75 percent, up from 15.6 percent in 2016. In fiscal 2017, gross margin increased by 31 basis points to 15.41 percent, from 15.1 percent in 2016.

Spinner said the increase came from the company’s 2016 reorganization to three sales regions, each with one president and associates offering products across all categories. “We saw our gross margin stabilize early in the year, then expand with a 15 basis point improvement over prior year in our fiscal fourth quarter 2017,” he said.

The gross-margin increase came despite deflation that reduced sales value about $130 million in fiscal 2017, Spinner said. UNFI also saw its customer base reduced through consolidation, and many customers saw challenging same-store sales, he said.

Nevertheless, UNFI enjoyed its second-highest free cash flow, $224.7 million, Spinner reported. At the end of fiscal 2016, the company’s free cash flow was $255.2 million. For the fourth quarter, free cash flow was $101.6 million; it was $78.7 million for the same period in 2016.

“We continue to adapt and grow in an operating environment that is evolving in ways we’ve never seen. Consumers are shopping for better-for-you food in an increasing number of store formats and channels,” Spinner said. “They want variety, and that includes newer and more established brands, exclusive brands, and private label. We are helping our retail customers across those formats, channels and product offerings with merchandising, data analysis and category management.”

UNFI reported other financial results, as well:

  • Net income for the fourth quarter of 2017 was $38.9 million, a 12.1 percent increase from the fourth quarter of 2016. For the year, 2017 net income increased 3.5 percent to $130.2 million from $125.8 million in fiscal 2016.
  • Operating income fell $1 million to $61.5 million for the fourth quarter of fiscal 2017 compared to the same period in fiscal 2016. For fiscal year 2017, operating income was $1.9 million higher ($226 million) than it had been in fiscal year 2016.
  • Operating expenses increased $24.2 million in the fourth quarter of fiscal 2017 to $307.1 million. For the fiscal year, operating expenses rose $147.7 million to $1.2 billion. Operating expenses were 12.97 percent of net sales for the year, 51 basis points higher than in fiscal 2016.

Spinner also acknowledged the leadership, poise and dedication of UNFI employees who kept buildings and systems running during and following hurricanes Harvey and Irma. Needed supplies were delivered to the affected areas quickly and safely, he said.

He also reported that all UNFI associates were safe and accounted for following the storms; the company’s warehouses are in good shape and operating, he added.

Correction: September 14, 2017
The fourth-quarter gross margin was 15.6 percent in 2016. An earlier version had the wrong year for comparison to 2017.
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