United Natural Foods, Inc. (NASDAQ:UNFI) delivered a strong performance on net sales, which was due in part to sales generated from Tony's Fine Foods. Tony's was acquired during the fourth quarter of the company's fiscal 2014. Investors may notice that EPS grew slower than operating income and operating income grew slower than net sales. In my original article, I outlined my thesis that weak margins were poised to continue. One of the challenges for UNFI is that gross margins declined by 92 basis points year over year, from 16.9% to 16.0%. The issues cited as impacting gross margin were dilution from Tony's sales, a shifting customer mix, inbound freight costs, and foreign exchange losses from the declining value of the Canadian dollar.
Despite citing dilution from Tony's sales as a factor for driving gross margin down, management stated that Tony's Fine Foods performed very well during the first quarter and that they were eager to roll out the products across the US. While I expect the company will continue to have rapid sales growth, I'm concerned about the statements regarding gross margin dilution. I expected the Tony's acquisition to play well for the company by generating synergies in the distribution framework.
EPS growth was slowed slightly by an increase in diluted shares outstanding. However, the share count was only up by 0.76%. Interest expense, on the other hand, was up by 75.57%. Long-term debt is also up to about $170 million from $32.5 million year over year. In that sense, the increase in interest expense looks relatively small. If you feel up to the reading, here is the entire press release.
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