March 11, 2020
National food distributor United Natural Foods Inc. has seen double-digit year-over-year sales for the past two weeks because consumers seem to be stocking up to cook at home, CEO Steve Spinner said during Wednesday morning's earnings call.
"Our growth related to COVID-19 has been significant. UNFI's last two weeks of sales has resembled our prior year's Thanksgiving holiday week—with the difference being we, our suppliers and our customers did not have the lead time required to adequately prepare," Spinner said.
The sales increases began on the East and West coasts but more recently moved to Midwestern cities, he said. UNFI executives expected to see increased demand for 300 to 400 items, but sales exceeded UNFI's expectations. The spike has been storewide: frozen foods, rice, canned foods, nuts and staples.
Distribution centers have been operating around the clock, seven days a week, to fulfill orders and get them delivered, Spinner said. But suppliers have been challenged as well, trying to provide the products consumers want.
While UNFI executives obviously have no idea how long the sales increase will continue, leaders also are looking at keeping its employees and customers safe and secure as the virus spreads. The World Health Organization announced after the earnings call that coronavirus is a pandemic.
No cases of coronavirus have been reported by any employees in the distribution centers or the corporate office, Spinner said. He implied that giving employees paid time off, should they become ill, will not be an issue.
"We'll obviously do the right thing for the associates," he said.
The company has determined how it will continue to fulfill customers' orders if a distribution center has to shut down. Jill Sutton, the company's chief legal officer, said any closures would be short-term while the facility was decontaminated.
Retailer bankruptcies validate Supervalu acquisition
"At the same time, the retail environment continues to be challenging, and the closing of stores by certain of our customers reflects that fact, as well as validates UNFI's strategic transaction 18 months ago," he said, referring to UNFI's controversial purchase of rival distributor SuperValu. Within 10 days in late January and early February, three small natural retail chains—Fairway Market, Lucky's Market and Earth Fare—filed bankruptcy and closed all or most of their locations.
As he has in the past, Spinner pointed out that the company's leadership expected independent natural retailers would be pressured as larger, conventional grocers added natural products to their sales mix. Already, consumers who shopped at the three failed chains are purchasing similar products from other UNFI customers.
"We see this as a sign that demand remains strong for products we supply, and that consumers will find new shopping patterns to meet their needs," he continued.
Although Fairway Market, Lucky's Market and Earth Fare were not in arrears with UNFI, their bankruptcies cost the distributor $33 million in the second quarter, which ended Feb. 1. Nevertheless, the company's results generally improved from a year ago:
Net sales of $6.14 billion, compared to $6.15 billion in fiscal 2019. This is the first quarter in which sales can be compared to UNFI and Supervalu's combined sales.
Net loss of $31 million, compared with $342 million a year ago.
Gross margin was 12.63%, compared with 12.39% for Q2 2019. The current quarter's gross margin includes an inventory shrink expense of $4.2 million or 0.07% of net sales due to the bankruptcies.
Adjusted gross margin last year was 12.53% when accounted for a fair value adjustment of inventory because of the Supervalu acquisition.
Operating loss of $5.1 million, including $33.1 million because of the bankruptcies and $29.7 million of expenses related to integrating Supervalu. Operating loss in Q2 2019 was $408.1 million.
Adjusted operating income was $24.6 million, or 0.4% of net sales this year, compared with $18.5 million or 0.3% of net sales last year.
The company also reported that it reduced net debt $149 million compared to the first quarter of 2020.
By channel, UNFI reported that bigger retailers are performing better than smaller ones:
Supermarket sales were $3.88 billion, down 1.2% from $3.92 billion a year ago. The company raised its Q2 2019 sales in this channel about $26 million after it reclassified a customer as a supermarket.
The Supernatural channel, which consists only of Whole Foods Markets, saw sales of $1.2 billion, a 10% increase from $1.1 billion.
In the Independents channel, sales fell 6.5% to $631 million from $675 million. The decrease is attributable to the bankruptcies, Spinner said. Sales in Q2 2019 were adjusted down $135 million to reflect reclassifications to the Supermarket and Other channels.
In the Other channel, sales were $418 million, down 6.3% from $446 million a year earlier. The company's decision to "exit a portion of our military business over the past 12 months," caused much of that decrease, Spinner said. With the classification adjustments, Q2 2019 sales increased $109 million.
UNFI's sales to its top 100 customers increased 4.3% over a year ago—with customers No. 2 through No. 100 seeing a 2.2% increase, Spinner said. Those top 100 customers make up about 75% of the company's total volume, he added.
For smaller customers, UNFI has "begun executing a detailed strategy" to help them take advantage of the distributor's broad range of products and services and help them be more successful in the long term, Spinner said.
On the distribution side, UNFI's distribution center in Portland, Oregon, is expected to close by the end of the current quarter, consolidating the operations of five DCs into just two. A 1 million square-foot, automated distribution center in Merino Valley, California—west of Los Angeles—is scheduled to open this quarter.
In addition, the company is consolidating five distribution centers in southern Florida, the result of Supervalu's purchase of two smaller companies shortly before UNFI purchased Supervalu.
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