United Natural Foods, Inc. Reports Second Quarter Fiscal 2019 Results

PROVIDENCE, R.I., March 5, 2019 /PRNewswire/ -- United Natural Foods, Inc. (NYSE: UNFI) (the "Company" or "UNFI") today reported financial results for the second quarter of fiscal 2019 ended January 26, 2019.

Second Quarter Fiscal 2019 Highlights

• Net Sales Increased To $6.15 Billion, Including $3.47 Billion From SUPERVALU
• Legacy UNFI Sales Increased 5.8%
• Results Include $370.9 Million Non-Cash Goodwill Impairment Charge

"I'm pleased by the tremendous work and meaningful progress our team accomplished this quarter on the integration of SUPERVALU and the positioning of UNFI as the premier food distribution company in North America," said Steven L. Spinner, Chairman and Chief Executive Officer.  "We know realizing all the benefits of this combination will take time, and we're focused on executing against our plan for the long-term.  We experienced higher than anticipated costs, largely associated with our network realignment projects resulting primarily from SUPERVALU's previous acquisitions, which we believe will be short-term in nature.  I'm confident we have the people and resources focused on this integration and remain optimistic about our drive towards operating as one company with the broadest product selection, services offering and scaled supply chain."

Second Quarter Fiscal 2019 Summary

Net sales from continuing operations by customer channel for the second quarter of fiscal 2019 compared to the second quarter of fiscal 2018 were as follows ($ in millions):

Gross margin for the second quarter of fiscal 2019 was 12.39% of net sales and included an $8.6 million, or 0.14% of net sales, inventory fair value adjustment charge related to the acquisition of SUPERVALU. When excluding this charge, gross margin in the second quarter of fiscal 2019 was 12.53% of net sales compared to 14.70% of net sales for the second quarter of fiscal 2018.  The decline in the gross margin rate was driven by the addition of SUPERVALU at a lower gross profit rate as well as a shift in customer mix, including the faster growth of the supernatural channel relative to the other customer channels.

UNFI has elected to move onto the LIFO method of inventory valuation for certain product categories.  This, combined with a higher inflation assumption for the combined business, is expected to add an additional $10-$15 million in non-cash expense to fiscal 2019 results.

Operating expenses in the second quarter of fiscal 2019 were $751.9 million, or 12.23% of net sales, compared to $320.1 million, or 12.66% of net sales for the second quarter of fiscal 2018.  The decrease in operating expenses, as a percent of net sales, was driven by the benefit of acquisition synergies.

Restructuring, acquisition, and integration related expenses in the second quarter of fiscal 2019 were $47.1 million including certain charges related to the divestiture of retail banners.

Goodwill and asset impairment charges were $370.9 million in the second quarter of fiscal 2019 resulting from an impairment assessment conducted in the second quarter, which indicated a goodwill impairment attributed to the SUPERVALU Wholesale reporting unit. Goodwill and asset impairment charges were $11.2 million in the second quarter of fiscal 2018 related to the Company's Earth Origins Market retail business, which was completely disposed of in the fourth quarter of fiscal 2018.  Following this impairment charge, approximately $481.1 million of goodwill remains on the balance sheet.

Operating (loss) income was $(408.1) million in the second quarter of fiscal 2019 and included a goodwill impairment charge of $370.9 million, restructuring, acquisition, and integration related expenses of $47.1 million, and an $8.6 million inventory fair value adjustment charge associated with the purchase of SUPERVALU. When excluding these items, operating income was $18.5 million, or 0.30% of net sales, in the second quarter of fiscal 2019.  Operating income in the second quarter of fiscal 2018 was $40.2 million, or 1.59% of net sales and included goodwill and impairment charges of $11.2 million.  When excluding these charges, operating income for the second quarter of fiscal 2018 was $51.4 million or 2.04% of net sales.  The decrease in operating income, as a percent of net sales, was primarily driven by lower gross margins, as a percent of net sales, partially offset by lower operating expenses, as a percent of net sales.

Adjusted EBITDA for the second quarter of fiscal 2019 was $142.6 million compared to $79.8 million for the second quarter of fiscal 2018.  The increase was predominantly driven by the addition of SUPERVALU.

Interest expense, net for the second quarter of fiscal 2019 was $58.7 million and included expense of $2.5 million related to interest on the now-retired SUPERVALU senior notes and $1.0 million of unamortized debt issuance costs for certain term loan prepayments made in the quarter with asset sale proceeds. When excluding these amounts, interest expense, net was $55.2 million compared to $4.1 million for the second quarter of fiscal 2018.  The increase in interest expense, net was driven by the acquisition financing.

Effective tax rate for continuing operations for the second quarter of fiscal 2019 was 20.2% compared to (38.4)% for the second quarter of fiscal 2018.  The second quarter of fiscal 2019 effective tax rate reflects a tax benefit based on consolidated pre-tax loss from continuing operations. In the second quarter of fiscal 2018, the Company recognized a provisional one-time non-cash net tax benefit from the Tax Cuts and Jobs Act of $21.9 million representing the estimated impact of the remeasurement of U.S. net deferred tax liabilities based on the new lower corporate income tax rate. Excluding this provisional one-time net tax benefit of $21.9 million, the Company's effective tax rate would have been 21.6% for the second quarter of fiscal 2018.

In February, UNFI made cash tax payments of approximately $59 million in conjunction with anticipated 338g tax elections related to the acquisition of SUPERVALU.  These elections allow UNFI to utilize a portion of SUPERVALU's $2.9 billion capital loss carryforward to generate estimated net cash tax savings of $300 million over the next 15 years.

Net (loss) income for the second quarter of fiscal 2019 was $(341.7) million, including $21.4 million of income related to discontinued operations compared to $50.5 million for the second quarter of fiscal 2018.  The decrease in net income was primarily the result of goodwill and asset impairment charges as well as restructuring, acquisition, and integration related expenses and increased interest expense.

(Loss) Earnings Per Share (EPS) was $(6.72) for the second quarter of fiscal 2019 compared to $0.99 for the second quarter of fiscal 2018. Adjusted EPS was $0.44 for the second quarter of fiscal 2019 compared to adjusted EPS of $0.71 in the second quarter of fiscal 2018, reflecting lower operating income and higher interest expense.

Debt reduction during the second quarter (compared to first quarter balances) was approximately $120 million with cash from operations, net of capital expenditures, and the proceeds from asset sales.  In addition, capital lease obligations were reduced by approximately $47 million, including $31 million that are now considered long term liabilities.

Fiscal 2019 Guidance
UNFI is updating fiscal 2019 guidance, other than for net sales, to reflect the Company's most recent business performance and outlook, for the 53-week fiscal 2019 (inclusive of SUPERVALU) as follows:

Conference Call and Webcast
The Company's second quarter fiscal 2019 conference call and audio webcast will be held today, Tuesday, March 5, 2019 at 5:00 p.m. ET.  A webcast of the conference call (and supplemental materials) will be available to the public, on a listen only basis, via the internet at the Investors section of the Company's website www.unfi.com.  An online archive of the webcast (and supplemental materials) will be available for 120 days.

About United Natural Foods

(NOTE: On October 22, 2018, UNFI completed the acquisition of SUPERVALU INC. For more information on the acquisition, please visit www.bettertogether.unfi.com.)

UNFI is North America's premier food wholesaler delivering the widest variety of products to customer locations throughout North America including natural product superstores, independent retailers, conventional supermarket chains, ecommerce retailers, and food service customers.  By providing this deeper 'full-store' selection and compelling brands for every aisle, UNFI is uniquely positioned to deliver great food, more choices, and fresh thinking to customers everywhere. Combined with SUPERVALU, UNFI is the largest publicly-traded grocery distributor in America with expected annual sales of over $21 billion. To learn more about how UNFI is Moving Food Forward, visit www.unfi.com.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Statements in this press release regarding the Company's business that are not historical facts are "forward-looking statements" that involve risks and uncertainties and are based on current expectations and management estimates; actual results may differ materially. The risks and uncertainties which could impact these statements are described in the Company's filings under the Securities Exchange Act of 1934, as amended, including its quarterly report on Form 10-Q for the period ended October 27, 2018 filed with the Securities and Exchange Commission (the "SEC") on December 6, 2018 and other filings the Company makes with the SEC, and include, but are not limited to, the Company's dependence on principal customers; the Company's sensitivity to general economic conditions including changes in disposable income levels and consumer spending trends; the Company's ability to realize anticipated benefits of its acquisitions and dispositions, in particular, its acquisition of SUPERVALU; the possibility that restructuring, asset impairment, and other charges and costs we may incur in connection with the sale or closure of SUPERVALU's retail operations will exceed current estimates; the potential for additional goodwill impairment charges as a result of purchase accounting adjustments or otherwise; the Company's reliance on the continued growth in sales of higher margin natural and organic foods and non-food products in comparison to lower margin conventional products; increased competition in the Company's industry as a result of increased distribution of natural, organic and specialty products by conventional grocery distributors and direct distribution of those products by large retailers and online distributors; increased competition as a result of continuing consolidation of retailers in the natural product industry and the growth of supernatural chains; the Company's ability to timely and successfully deploy its warehouse management system throughout its distribution centers and its transportation management system across the Company and to achieve efficiencies and cost savings from these efforts; the addition or loss of significant customers or material changes to the Company's relationships with these customers; volatility in fuel costs; volatility in foreign exchange rates; the Company's sensitivity to inflationary and deflationary pressures; the relatively low margins and economic sensitivity of the Company's business; the potential for disruptions in the Company's supply chain by circumstances beyond its control; the risk of interruption of supplies due to lack of long-term contracts, severe weather, work stoppages or otherwise; moderated supplier promotional activity, including decreased forward buying opportunities; union-organizing activities that could cause labor relations difficulties and increased costs; and the ability to identify and successfully complete acquisitions of other natural, organic and specialty food and non-food products distributors.   Any forward-looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. The Company is not undertaking to update any information in the foregoing reports until the effective date of its future reports required by applicable laws. Any estimates of future results of operations are based on a number of assumptions, many of which are outside the Company's control and should not be construed in any manner as a guarantee that such results will in fact occur. These estimates are subject to change and could differ materially from final reported results. The Company may from time to time update these publicly announced estimates, but it is not obligated to do so.

Non-GAAP Financial Measures: To supplement the financial information presented on a U.S. generally accepted accounting principles ("GAAP") basis, the Company has included in this press release non-GAAP financial measures for adjusted EBITDA and adjusted earnings per diluted common share. The Company has also included in this press release projected non-GAAP financial measures for estimated adjusted EBITDA and estimated adjusted earnings per diluted common share for the fiscal year ending August 3, 2019.  The non-GAAP measures adjusted earnings per diluted common share and estimated adjusted earnings per diluted common share exclude goodwill and asset impairment charges, restructuring, acquisition, and integration related expenses, loss on debt extinguishment and interest on SUPERVALU's senior notes during their mandatory redemption period, and inventory fair value adjustment expense.  The non-GAAP measures adjusted EBITDA and estimated adjusted EBITDA exclude total other expense, net, (benefit) provision for income taxes, depreciation and amortization, share-based compensation, goodwill and asset impairment charges, restructuring, acquisition and integration related expenses, and inventory fair value adjustment related to the acquisition of SUPERVALU.

The reconciliation of these non-GAAP financial measures to their comparable GAAP financial measures are presented in the tables appearing below. The presentation of non-GAAP financial measures is not intended to be considered in isolation or as a substitute for any measure prepared in accordance with GAAP. The Company believes that presenting non-GAAP financial measures aids in making period-to-period comparisons, assessing the underlying operating performance of the Company and understanding core business trends, and is a meaningful indication of its actual and estimated operating performance. The Company currently expects to continue to exclude the items listed above from non-GAAP financial measures and may also exclude other items that may arise.  Management utilizes and plans to utilize these non-GAAP financial measures to compare the Company's operating performance during the 2019 fiscal year to the comparable periods in the 2018 fiscal year and to internally prepared projections.

SOURCE United Natural Foods, Inc.

Related Links

https://www.unfi.com