Dive Brief:

• United Natural Foods, Inc. (UNFI) expects to renew its Whole Foods contract early next year, Chairman and CEO Steve Spinner said during the company’s earnings call on Wednesday. He also said the company plans to name a new CEO around the same time. Spinner announced his retirement in September.
• UNFI introduced a cost-cutting initiative known internally as “Value Path,” which aims to save between $70 million and $100 million by the end of fiscal 2023. The initiative is a "fine-tuning of our operating model," Eric Dorne, UNFI's chief operating officer, said during Tuesday's call and touches numerous areas including delivery, warehouse operations and private brand sourcing.
• The wholesaler has benefited from elevated at-home consumption and cross-selling natural and conventional products, but its first quarter earnings report missed estimates for sales and earnings per share. UNFI reported a net sales increase of 6%, to $6.67 billion, while earnings per share grew to 51 cents. Adjusted earnings before interest, taxes, depreciation and amortization increased 30.6% to $159 million.

Dive Insight:

UNFI’s ability to extend its contract with Whole Foods has been viewed by investors and industry experts as a key step despite the wholesaler’s continued efforts to minimize reliance on its largest customer.

Still, the news that the company should be able to strike a new deal in a matter of months didn’t assuage investor anxiety over the earnings miss and revised guidance due to a higher debt load and capital expenditures. UNFI’s stock price fell more than 14% on Tuesday.

Spinner said UNFI and Whole Foods expect to hammer out a deal early next year after delaying talks due to the pandemic. The companies’ current contract expires in October 2025.

“I have every expectation, and they have every expectation, that this is going to get done in the first part of next year,” Spinner said during the call.

The naming of a new CEO, meanwhile, promises to further stabilize the company, which is coming off of a roller coaster two-year period that has seen a difficult Supervalu integration followed by a business-boosting health crisis.

“Our process has been quite robust and has identified exemplary talent both inside and outside of UNFI,” Spinner said. “I'm also excited about our search for board members, who bring a wider range of transformational and large-scale experience to our company.”

UNFI has been focused on building out sales with existing customers by cross-selling natural and conventional goods, and on winning new business. Executives say they see a $140 billion addressable market, including $38 billion in incremental sales with existing customers.

In October, UNFI announced Key Food, which has more than 315 stores, as a client and plans to service the chain from a new distribution center in Allentown, Pennsylvania, beginning late next year. The contract is expected to bring in $1 billion annually over the next 10 years, but Chief Financial Officer John Howard said Wednesday that constructing the facility will add $50 million to UNFI’s capital expenditure budget for fiscal 2021, bringing it to a range of $250 million to $300 million and cutting into its earlier debt-reduction projections.

The wholesaler said the new facility will help it service other retailers in the New York metro area, and some of the higher spending should be offset by its Value Path program. UNFI is also consolidating distribution centers and adding automation to increase throughput and efficiency.

Despite the earnings misses, UNFI has benefited substantially from at-home consumption during the pandemic and sees long-term changes ahead to consumer behavior that will benefit its business.

“Food-at-home consumption will remain structurally higher and provide a strong tailwind to our business,” Spinner said. “The strategic steps we're taking are providing benefits today and more importantly they're positioning us for continued success in a post-COVID environment.”