Dive Brief:

• United Natural Foods, Inc. (UNFI) reported adjusted earnings for the first fiscal quarter of 2020 at 12 cents per share, below the Wall Street estimate of 27 cents. The wholesaler reported net sales for the quarter of $6 billion and gross margin rate of 12.81% of net sales compared to 14.38% over the same period last year. The lower gross margin rate reflected the addition of Supervalu’s business at a lower gross profit rate.
• UNFI executives said the results fell in line with expectations and said profitability will improve throughout fiscal 2020 as it continues to build efficiencies in distribution, particularly on the West Coast, and sales trends break in the company’s favor.
• The company reaffirmed its guidance of $23.5 billion to $24.3 billion in net sales in fiscal year 2020 and between $560 million and $600 million in adjusted earnings.

Dive Insight:

After a challenging fiscal 2019, UNFI opened 2020 by missing the mark on profitability, sending its stock price down 8% in early trading. The results won’t do much to allay investor concerns about the company post-merger, but officials maintained they’re creating a more efficient supply chain and positioning the business to capitalize on key retail and consumer trends.

UNFI made several moves on the West Coast in Q1 to optimize its distribution facilities. It closed down distribution centers in Tacoma, Washington, and Portland, Oregon, and funneled customers into its new Centralia, Washington, warehouse. It also closed an Auburn, Washington, distribution center and moved fulfillment over to an expanded facility in Ridgefield, Washington.

Further south, UNFI transitioned specialty business from a distribution facility in Auburn, California, to one in Gilroy. UNFI chairman and CEO Steve Spinner said UNFI has also added 1.2 million square feet of multi-temperature capacity to a distribution center in Moreno Valley, California, which will improve its ability to fill orders in the dynamic Southern California market.

Altogether, the streamlining steps will improve UNFI's ability to gain retail business as consumer tastes continue to evolve.

"We see strong growth potential from adding new customers as well as expanding our offering to existing customers" on the West Coast, Spinner said during the company’s earnings call Wednesday.

Independent grocers continue to be a challenge for the new UNFI, with many of these retailers cutting back on spending. "This is the channel that’s struggling," Spinner said, adding, "Their growth is a little like a roller coaster."

UNFI has also struggled to integrate Supervalu and its pre-acquisition purchases, most notably Unified Grocers. Bringing on the lower-margin business and funneling both companies into common systems has pushed down comp sales and profitability, but Spinner and other executives expect results to improve now that UNFI has completed most of the transitional work.

Last quarter, UNFI announced it would not be able to hit its previously announced profit target of $28 billion in annual net sales and $900 million in adjusted EBITDA by 2022. The company now expects sales to grow annually in the low single digits over that period, amounting to between $500 million and $700 million in annual earnings.

In addition to building out efficiencies, much of UNFI’s success hinges on executing its "build out the store" strategy, which consists of selling legacy natural products to conventional retailers, and conventional products to specialty retailers. The tactic is working so far with its top 25 customers, which comprise 54% of sales. But it’s a tougher sell with independent retailers.

Last week, UNFI announced it had sold 13 Shoppers Food & Pharmacy stores to three retailers — revealed as Lidl, Compare Foods and McKay's — and will close four other locations. Spinner said the company is continuing to market its remaining 30 or so Shoppers stores to "several" potential buyers. It’s also shopping its Cub Foods banner around, with the plan to sell off the entire chain by sometime next year. Spinner said UNFI should have an update on the Cub sale by March.

"We’ve given presentations to interested parties, and process is moving forward," he said.