UNFI sales jump 22.5%

United Natural Foods Inc. (Nasdaq: UNFI) reported financial results for the second quarter of fiscal 2015 ended Jan. 31, 2015.

Second quarter fiscal 2015 highlights

“In the second quarter fiscal 2015 UNFI surpassed $2.0 billion in quarterly net sales for the first time in its history, continuing to demonstrate strong demand for our products and services. We also faced several challenges during the quarter highlighted by weakness in the Canadian dollar and a non-recurring reduction to net sales associated with a contractual obligation to a customer that we identified and brought to their attention. Despite these challenges we delivered on an adjusted basis operating income growth of over 17 percent during the quarter and 21 percent year to date,” said Steven Spinner, president and chief executive officer.

Net sales for the second quarter of fiscal 2015 increased 22.5 percent, or $370.5 million, to $2.02 billion from $1.65 billion in the second quarter of fiscal 2014. The second quarter of fiscal 2015 included net sales of approximately $232.6 million from the Company's acquisition of Tony's Fine Foods in the fourth quarter of fiscal 2014. In the second quarter, the Company recognized a non-recurring reduction in net sales of $7.7 million to reflect amounts owed to a customer resulting from an incorrect calculation of contractual obligations to a customer from fiscal 2009 through fiscal 2014. The Company identified the incorrect calculation and brought it to the attention of its customer. The Company is recognizing the reduction in the current fiscal year because it has concluded that the impact on prior periods was not material. The aggregate amount of the reduction in net sales related to this incorrect calculation was $9.3 million, which includes a $1.6 million reduction in net sales in the first quarter of fiscal 2015.

Gross margin decreased 145 basis points to 14.8 percent for the second quarter of fiscal 2015 compared to 16.3 percent for the same period last year. The decrease was primarily due to the dilution from Tony's net sales, unfavorable foreign exchange for the Company's Canadian business, a shift in mix of sales, lower fuel surcharges, and the non-recurring item noted above.

Total operating expenses were 12.4 percent as a percentage of net sales for the second quarter of fiscal 2015, a decrease of 94 basis points compared with the same period last fiscal year. Total operating expenses increased $30.4 million, or 13.8 percent, to $249.7 million for the second quarter of fiscal 2015 as compared to $219.3 million in the second quarter of fiscal 2014, primarily due to additional costs required to service higher sales volume. Total operating expenses for the second quarter of fiscal 2015 included a $0.2 million restructuring charge due to the closure of the Company's Aux Mille facility located in Quebec, Canada, and startup costs of approximately $0.6 million related to the Company's Hudson Valley, N.Y., and Auburn, Calif., facilities.

Operating income increased 1.3 percent, or $0.7 million, to $49.5 million for the second quarter of fiscal 2015 compared to $48.8 million for the second quarter of fiscal 2014. As a percentage of net sales, operating income for the second quarter of fiscal 2015 decreased 52 basis points to 2.5 percent compared to the same period last fiscal year. Adjusted operating income increased 17.2 percent, or $8.4 million, to $57.2 million for the second quarter of fiscal 2015, excluding the reduction in net sales noted above.

Net income for the second quarter of fiscal 2015 decreased $0.1 million, or 0.4 percent, to $27.8 million, or $0.55 per diluted share, from $28.0 million, or $0.56 per diluted share, for the second quarter of fiscal 2014. Adjusted net income for the second quarter of fiscal 2015 increased $4.6 million, or 16.4 percent, to $32.5 million, or $0.09 per diluted share, to $0.65 per diluted share excluding the reduction in net sales noted above. Adjusted operating income, adjusted net income and adjusted earnings per diluted share are non-GAAP financial measures. Please refer to the tables in this press release for a reconciliation of all non-GAAP financial measures.

“During the quarter we continued to improve our business through increasing capacity and network optimization. Specifically, we opened two new distribution centers and closed an underperforming location in Quebec Canada, merging it into our Montreal facility. We’ve made long-term strategic decisions to ensure that our growth rate continues despite the short-term cost,” added Mr. Spinner.

Fiscal 2015 year to date summary
Net sales for the six months ended Jan. 31, 2015, totaled $4.01 billion, a 23.4 percent increase over the comparable prior fiscal year period. Gross margin decreased 119 basis points to 15.4 percent compared to the six months ended Feb. 1, 2014. This decrease was primarily due to the dilution from Tony's net sales, a shift in mix of sales, unfavorable foreign exchange for the Company's Canadian business, and the non-recurring item noted above.

At 12.7 percent of net sales, total operating expenses for the six months ended Jan. 31, 2015 were 89 basis points lower than the comparable prior fiscal year period. Total operating expenses increased $67.8 million, or 15.3 percent, to $510.3 million from $442.5 million for the six months ended Feb. 1, 2014. The six months ended Jan. 31, 2015 included startup costs of approximately $1.8 million related to the Company's Hudson Valley, N.Y., and Auburn, Calif., facilities, $0.6 million associated with the write-off of an intangible asset related to the Company's Canadian division, which was acquired in June 2010, a $0.2 million restructuring charge related to the closure of the Company's Aux Mille facility located in Quebec, Canada, and approximately $0.3 million in costs related to the Company's acquisition of Tony's.

Operating income for the six months ended Jan. 31, 2015 increased 11.4 percent, or $11.0 million, to $107.9 million from $96.9 million for the six months ended Feb. 1, 2014. Operating income as a percentage of net sales decreased 29 basis points to 2.7 percent compared to the same period last fiscal year. Adjusted operating income increased $20.4 million, or 21.0 percent, to $117.2 million for the six months ended Jan. 31, 2015, excluding the reduction in net sales noted above.

Net income for the six months ended Jan. 31, 2015 increased $5.2 million, or 9.3 percent, to $60.9 million, or $1.21 per diluted share, from $55.7 million, or $1.12 per diluted share for the six months ended Feb. 1, 2014. Adjusted net income for the six months ended Jan. 31, 2015 increased $10.8 million, or 19.4 percent, to $66.5 million, or $0.21 per diluted share, to $1.33 per diluted share excluding the reduction in net sales noted above.

Updated fiscal 2015 guidance
Based on UNFI's performance to date and the current outlook for the remainder of fiscal 2015, UNFI is updating its previous guidance for fiscal 2015 provided on Sept. 17, 2014, to reflect the continued negative impact of the decline in the Canadian dollar on the Company's results and the impact of the $7.7 million reduction in net sales recorded in the second quarter of fiscal 2015. For fiscal 2015, ending Aug. 1, 2015, the Company expects net sales in the range of approximately $8.19 to $8.29 billion, an increase of approximately 20.5 percent to 22.0 percent over fiscal 2014. The Company estimates GAAP earnings per diluted share for fiscal 2015 in the range of approximately $2.81 to $2.90 per share, an increase of approximately 11.5 percent to 15.1 percent over fiscal 2014 GAAP earnings per diluted share of $2.52. Adjusted for the impact of the $7.7 million reduction in net sales, adjusted earnings per diluted share for fiscal 2015 is expected to be in the range of $2.90 to $2.99, an increase of approximately 15.1 percent to 18.7 percent over fiscal 2014 GAAP earnings per diluted share of $2.52.