Dive Brief:

• United Natural Foods, Inc. (UNFI) posted net sales during its second fiscal quarter that were up 5.4% year-over-year, to $7.8 billion, but net income and earnings per diluted share both plummeted by more than 70%, the grocery retailer and wholesaler reported Wednesday.
• The company sharply reduced its forecast for the full fiscal year and withdrew its guidance for 2024.
• UNFI’s results for Q2 represent a sharp turnabout from its first-quarter results when the company reported an increase in profitability and reaffirmed its outlook for the year.

Dive Insight:

While UNFI’s net sales in the latest quarter represented the best quarterly performance by that measure in its history, executives were not anticipating that the company’s profitability would take such a hit, CEO Sandy Douglas said during the earnings call Wednesday.

UNFI benefited significantly during Q2 of 2022 because it was buying inventory ahead of supplier increases as inflation rose, but did not calculate that it would not be able to replicate its results during that quarter given changes in economic conditions, Douglas said.

“We did not have full visibility and sufficient detail into the commercial drivers of the benefits due to legacy issues with digital infrastructure and limiting real-time data, which is required to fully understand and forecast these profitability drivers,” Douglas told investors. UNFI spotted the issue late in Q2, which ended Jan. 28, leading it to slash its expectations for the coming quarters, according to Douglas.

UNFI saw inflation of just under 11% during Q2 compared with just over that amount during Q1, CFO John Howard said during the call. By contrast, the company recorded inflation of just under 6% during Q2 of 2022, Howard said.

UNFI’s net income fell 71.2% during Q2, to $19 million, while earnings per diluted share dropped 71.3%, to 31 cents. The company saw net sales rise across its divisions, with its supernatural group, which includes sales to Whole Foods Market, leading the way with a 14.2% increase.

For all of 2023, UNFI now expects net income for fiscal year 2023 to fall between $90 million and $142 million, down from the range of $247 million to $266 million it previously expected. The company believes EPS will be between $1.50 and $2.35, compared with its earlier guidance of $3.95-$4.25. UNFI also raised its forecast for net sales by 5%, to a range of between $30.1 billion and $30.5 billion.

Investors reacted quickly to UNFI’s unexpected drop in profitability. The company’s stock price was down more than $10 per share Wednesday morning, a drop of more than 25% from its close the day before at $40.96.

Douglas, who arrived at UNFI in mid-2021, said the company is engaged in a “transformation agenda” as it looks to strengthen its performance going forward. UNFI plans to increase network automation and optimization, simplify its pricing and procurement processes, enhance its digital offerings and modernize digital infrastructure as part of that plan.

“This quarter's results serve as further support of the need for our transformation initiatives. With urgency, we are working to finalize our plans,” Douglas said.

Douglas added that UNFI’s private brand performance grew by double digits in Q2, adding that he is “pleased about the results” of the company’s efforts to build that part of its business.

“There's a lot of opportunity for us to continue to give our retailers a competitive edge with very well-positioned brands,” Douglas said.