Dive Brief:
- United Natural Foods, Inc. (UNFI) adjusted its long-term outlook Tuesday, saying it won't be able to hit its goal of around $28 billion in annual net sales and $900 million in adjusted EBITDA by 2022. The distributor closed out the fiscal year with $21.4 billion in net sales and $560 million in earnings.
- The company projected net sales of $23.5 billion to $24.3 billion in fiscal year 2020 and between $560 million and $600 million in adjusted earnings. Executives did not set new financial targets for 2022, noting they expect sales to grow in the low single digits after fiscal 2020.
- UNFI's fourth quarter earnings came in below estimates at 44 cents per share while gross margins dropped 11.5% over the year-ago period. Executives attributed the sluggish results to softness in center store sales among its supermarket and independent retail customers, and to the ongoing investment pressures grocers are facing.
Dive Insight:
UNFI chairman and CEO Steve Spinner on Tuesday acknowledged what he called the "contrarian view" of the company — that it serves a challenged and shrinking retail customer base, and that poor results will only continue. The distributor's soft sales year looks particularly worrisome on the heels of a nearly $3 billion acquisition.
But Spinner said the new UNFI's beefed-up scale and assortment make it well-suited to serve a changing industry. He said many of the pressures retailers face are "cyclical," and noted that among UNFI's top 25 customers, wholesale sales were up 5.4% in Q4, and up 3.2% when excluding Whole Foods, its largest customer.
"What certain industry watchers may not fully appreciate is the demonstrated ability, or creativity and ingenuity of our largest customers to adapt and even grow in this evolving landscape," Spinner said.
Central to UNFI's strategy is convincing retailers to shift more of their spending to the company now that it carries more than 250,000 conventional and natural products. But it seems to have underestimated, at least in the short-term, retailers' willingness to accept that proposal.
"Fiscal 2019, which serves as the base for the subsequent years, was well below the expectations we set earlier," interim chief financial officer (CFO) John Howard said during UNFI’s earnings call.
Howard, who took over the interim CFO position in August after Mike Zechmeister left the company, said UNFI expects sales growth to be "tempered" in fiscal 2020, then accelerate in the years following.
Regarding its own retail stores, UNFI said it's working through "several transactions" on its Shoppers Food & Pharmacy banner, each involving multiple stores, and expects to divest by early next year. UNFI expects to offload its Cub Foods banner by the end of 2020. The company will include Cub Foods in its fiscal 2020 earnings but exclude Shoppers. The proceeds of both sales will go toward paying down debt.
UNFI said it achieved $70 million in cost synergies during fiscal 2019, nearly double what it estimated. It reaffirmed its goal of achieving $185 million in savings by 2022. UNFI also reduced its debt by $166 million in Q4, bringing its total outstanding debt to less than $3 billion.
Cost savings will help cover shortcomings in earnings and gross margins, executives said, ahead of a projected acceleration in sales.
As it approaches the one-year anniversary of the Supervalu acquisition, UNFI said it has completed the most difficult work in merging the two companies. It now operates under a single executive leadership team and has transitioned to unified systems in order processing, accounting and other operational departments. UNFI is also streamlining its network of distribution centers.
"We're absolutely thrilled that we’re through 2019," Spinner said. "As you might imagine it was ungodly complicated and difficult and hard to unwind and tough on the company in general, but we’re pretty much through it."
