Dive Brief:

• United Natural Foods posted net sales of $2.65 billion for this year’s third financial quarter, according to a company release. Earnings per share was $1.04 — better than the Wall Street estimate of 93 cents. The specialty distributor plans to top $10 billion in sales on the year.
• Gross margins for the quarter were 15.4%, a 5 basis point decrease from the same period a year ago. UNFI attributed this decline to higher freight rates and a shift in customer mix towards lower-margin shoppers.
• The company raised its annual guidance for net sales and earnings per share. “We are pleased with the continued momentum in our business and we continue to work to balance and improve upon the challenges associated with this higher-than-expected growth,” said Steve Spinner, UNFI’s chairman and CEO, in a statement.

Dive Insight:

United Natural Foods has long been a leader in the natural and organic product industry, and it’s made savvy moves over time to stay relevant. This year, the company expects to exceed $10 billion in net sales, and yesterday’s results did little to dampen that projection.

Whole Foods is UNFI’s largest customer, accounting for roughly a third of the distributor’s sales. Questions swirled about the future of that relationship following the specialty grocer’s $13.7 billion acquisition by Amazon last summer, but concerns have abated as Amazon has made it clear it prefers to rely on UNFI’s expertise rather than build out its own grocery distribution capabilities. The wholesaler will see the lion’s share of a $24.2 billion multiyear purchase agreement Amazon recently made on behalf of Whole Foods, CNBC reported. 

UNFI’s business with Whole Foods should accelerate as the grocer expands its Prime membership offers, including free two-hour delivery, a rewards credit card and 10% off select products. Amazon hasn’t discussed Whole Foods’ performance in recent quarters, but industry observers say its Prime offers should drive significant traffic increases.

The wholesaler continues to expand its partnerships with mainstream retailers, which for years have been increasing their assortment of natural and organic foods. UNFI has also made deals with specialty players, and these “supernatural” companies now account for nearly 20% of UNFI’s growth year-over-year. According to an 8-K filing last month, UNFI now supplies produce to Natural Grocers stores in 16 out of the 19 states where it operates.

Growth has actually been something of a burden for UNFI, with out-of-stocks accounting for $50 million in lost sales last quarter and $25 million the quarter before that. This quarter, UNFI’s out-of-stocks increased 150 basis points over the same period a year ago.

“Higher demand is pressuring our supply chain as we continue to see degradation in supplier inbound fill rates,” UNFI’s CEO Steve Spinner said during the company’s earnings call yesterday.

This is a good problem for the company to have, though it is a problem nonetheless. A trucker shortage that’s impacting companies across the industry is also compounding this issue, as well as higher freight rates.

UNFI may also come under pressure from Whole Foods to lower its prices. The two companies have enjoyed a long and mostly amicable relationship, but the grocer’s new owner has a reputation for efficiency and squeezing suppliers. 

Look for UNFI to continue growing and diversifying its business beyond Whole Foods, and to make additional acquisitions in the rapidly consolidating wholesale space. In the meantime, UNFI is processing some executive changes ahead of chief operating officer Sean Griffin’s retirement in October.