Why United Natural Foods Inc (NASDAQ: UNFI) stock is crashing

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United Natural Foods Inc (NASDAQ: UNFI) stock fell 25.1% on 7th December 2018 (as of 10:08 am GMT-5; Source: Google finance) post a disappointing performance. UNFI in the first quarter of FY 19 has reported the adjusted earnings per share of 55 cents, missing the analysts’ estimates for the adjusted earnings per share of 74 cents, as per Zacks Consensus Estimate. The company had reported the adjusted revenue growth of 16.7 percent to $2868.2 million in the first quarter of FY 19. Operating and SG&A expenses, excluding SUPERVALU, remained flat as a percentage of sales, but increased in dollars due to higher labor costs across the network and higher warehouse turnover increased over time and lower productivity.

From a channel perspective, first quarter supernatural net sales grew 20.4% over Q1 last year and represented about 35.8% of total net sales. The Independent channel net sales grew 4.4% and represented approximately 23% of total net sales. Supermarket channel net sales increased 0.6% versus Q1 last year in line with that 24.7% of net sales. The other channel was down 7.3% in Q1 compared to Q1 last year, driven primarily by ecommerce declines, where the company have rationalized out some of the less profitable business and the July sale of the Earth Origins Markets business. Gross margin for the first quarter was 14.38% of net sales and included incremental non-cash expense of $1.8 million to unwind the stepped-up basis for SUPERVALU inventory that resulted from purchase accounting. This unwind impact is expected to continue and add an additional $8 million to $9 million of non-cash expense in the second quarter

Excluding the $1.8 million of unwind expense, Q1 gross margin was 14.44% of net sales, a decrease of 50 basis points compared to the same period last year. The decline was driven by continued shift in customer mix, where net sales growth of the largest customer, outpaced growth of other customers with higher margins, and increased inbound freight expense, both of which were partially offset by improved vendor programs and higher fuel surcharge income.

Although inbound freight was still a year-over-year headwind, Q1 was the lowest the company have seen over the past 4 quarters as a percentage of net sales and was a meaningful sequential improvement over Q4 of fiscal ‘18. Q1 operating expenses totaled $363 million in the first quarter compared to $312 million in Q1 last year. Legacy UNFI operating expenses were up $21 million versus Q1 last year, but improved by 10 basis points as a percent of net sales.

 

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