A quick look at the chart shows that UNFI has been beaten down in each of its last three reports (including this quarter’s) as the stock has lost nearly 40% of its value on the year. For those who may not be familiar UNFI is a distributor of food, here meaning they don’t make the products they ship, they just help a product find a store and have solutions built around making that product the most visible, most widely available, and most likely to be purchased, product on the shelf.
In short, UNFI reported fourth quarter earnings per share (EPS) which fell short of market expectations at $0.76 on gross margins which, also, weren’t up to snuff at 14.50%. What’s more, despite growth of 10.5% from a year ago, net sales of $2.59 billion were short of what the market had forecasted.
The company highlighted that adjusted EPS benefited from a lower tax rate due to the Tax Cuts and Jobs Act of 2017. However, this benefit was partially offset by the impact of customer mix shift and inbound freight costs.
As to the gross margin miss, UNFI noted the 125 basis point decline from a year ago was a result of a shift in customer mix where net sales growth of the company’s largest customer outpaced growth of other customers with higher margin and by an increase in inbound freight costs. Going forward, though, management highlighted their confidence that the company can turn the headwind into a tailwind once certain freight costs are reflected in product costs.
Also of note, UNFI’s operating expenses were up $19.1 million to $326.2 million in the fourth quarter of fiscal 2018 compared to $307.1 million in the fourth quarter of fiscal 2017. The company recorded $4.6 million of restructuring and divestiture expenses in the fourth quarter of fiscal 2018 related to the previously announced restructuring and subsequent sale of its Earth Origins retail business and approximately $5.0 million of acquisition related costs associated with the pending SUPERVALU transaction.
Management also touched on the SUPERVALU acquisition, which is expected to close in the fourth quarter of calendar 2018. Giving some color on the expected synergies of the deal management highlighted a worse than expected low double-digit percentage increase to adjusted EPS in year one of the deal, excluding a one-time cost and the impact of purchase accounting. Following the close of the deal, management expects to lay out long-term strategic objectives and opportunities on an investor day call on January 16, 2019.
As to guidance, UNFI gave an underwhelming fiscal year 2019 outlook in terms of earnings. The company sees adjusted EPS for the year of $3.48-3.58, the midpoint of which was under market expectations. This, on top of the fact that the EPS guidance includes a $0.07 benefit from a 53rd week, and one can see why investors might be hesitant about the company’s outlook for the coming year. Management also guided FY19 net sales growth of 8.6-10.5% to about $11.1-11.3 billion vs a comparable year-over-year growth figure on a 52-week basis of 6.5%-8.4%.
The consecutive earnings issues at UNFI can’t inspire much confidence in management. It appears that the company’s issues with Amazon’s (AMZN 1,931.39, -12.91, -0.7%) Whole Foods may be disrupting the business more than originally feared. There may still time to iron out some of the kinks, though, ahead of the January analyst day.