Update: United Natural Foods Q3 2014 Earnings, Acquisition Weakens Margins

| About: United Natural (UNFI)
This article is now exclusive for PRO subscribers.

Summary

Diluted EPS of $.66 beat estimates by $.03 and was up 17.9% year over year.

Operating income was $58.4 million, up 21% year over year.

Net sales of $1.99 billion beat estimates by $30 million and was up 24.4% year over year.

Weak margins were predicted and occurred, down 92 basis points.

I expected more synergies from Tony’s Fine Foods, but so far it has not happened.

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.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis. The analyst holds a diversified portfolio including mutual funds or index funds which may include a small long exposure to the stock.