Dive Brief:

• United Natural Foods, Inc. (UNFI) reported net sales of $5.96 billion for the third fiscal quarter of 2019, including $3.24 billion from Supervalu. Adjusted earnings per share was 61 cents, nine cents higher than the Wall Street estimate.
• Gross margin for the quarter was 13.22% of net sales, a decline from the 15.41% margin seen in Q3 2018. Adjusted EBITDA was $168.2 million compared to $111.9 in the year-ago period. Both metric shifts are attributed to last year's Supervalu acquisition.
• UNFI adjusted its earnings outlook on the year. The company now expects a loss of $5.65 to $5.85 per share compared to the $6.10 to $6.50 per share loss outlined at the beginning of the fiscal year. Officials said they expect adjusted EBITDA for the year to end up at the lower range of the $580 million to $610 million outlined earlier this year.

Dive Insight:

UNFI benefited from the highest inflation rate it's seen in more than three years. Core parts of its business, however, struggled against a challenging retail environment. Natural sales growth slowed to 2.8% while conventional sales declined 3.6% compared to the year-ago period, when Supervalu was not part of UNFI. The company now refers to its legacy Supervalu business as "conventional" and legacy UNFI as "natural."

Sean Griffin, UNFI's chief operating officer, said soft center store sales were primarily to blame for the declines in conventional. He said sales should improve as UNFI increases its sale of natural products to that conventional channel. This so-called "cross selling" of natural products to conventional retailers and conventional products to natural retailers, which leverages UNFI's and legacy Supervalu's core assets, is a key part of the company’s strategy going forward.

Executives said changing consumer tastes and industry competition and changing consumer tastes have strained its retail customers' resources. Independent retailers, which make up a significant portion of Supervalu's business, are under considerable pressure.

"The retail environment continues to be challenging for many of our top customers who are now growing at more moderate levels," Steve Spinner, UNFI’s CEO said during the company's earnings call Wednesday. "New store openings have slowed as retailers adapt to changing consumer trends. However, we see signs of improvement ahead as higher inflation takes hold."

The Trump administration's tariffs on China and those proposed on goods coming in from Mexico — which retailers across industries have touched on in their earnings — are expected to have a minimal impact on UNFI's sales.

"Combined, our inventories associated with China and Mexico are less than 50 basis points of total inventory," Spinner said.

On the retail stores front, Spinner said UNFI continues to seek buyers for its Cub Foods and Shoppers Food & Pharmacy stores. The company has retained Greenhill & Co., an investment bank focused on mergers and acquisitions, to help secure a buyer for Cub. During Q3, UNFI closed its 30 Shoppers' pharmacy locations, selling off inventory and prescriptions to CVS and Walgreens, and divested six additional stores. Combined with the sale of a single distribution center, the asset sales netted UNFI $25 million in Q3.

Spinner, who previously stated UNFI would exit retail sometime this year, said it aims to do so sometime within the next 10 months.

Executives said the Supervalu integration, now in its eighth month, is continuing on track. The company brought several distribution centers online with common systems. It has also unified payroll and other operational systems and completed the most difficult work involved in streamlining distribution centers in Washington state and Pennsylvania. A new DC in Centralia, Washington is expected to start receiving products this summer and making shipments shortly after.

In April, the company announced a unified executive team under the UNFI name. It also added a new board member, James Muehlbauer, who previously held executive positions at The Valspar Corporation and Best Buy. Spinner said UNFI wants to add more board members in the coming months to help it navigate challenging sales and a difficult corporate integration.