United Natural Foods Earnings Call Insights: Gross Margins and Guidance

United Natural Foods (NASDAQ:UNFI) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Gross Margins

Edward Aaron – RBC Capital Markets: I guess you’ve had few things kind of go against you so far this year, just between the stock outs, the TMS issue and then some expenses maybe with Sandy. It sounds like it’s going to normalize, but you have a little bit of hole to dig out of particular around the gross margin. So I just was curious to know if there are any sort of incremental offsets on the positive side that keep you confident in your full year ranges?

Steven L. Spinner – President and CEO: Yeah, I mean, that we continue to see nice improvement in our productivity and our expense control around the country and that was evident in this quarter, in particular, and I think we’ll continue to see that. The top line sales for sure is terrific positive that we certainly think is going to continue throughout the year and that will really help us. So, I think those are two primary drivers that I can think of. It’s a terrific time to be in the industry, yes, we had higher degree of supplier out of stocks that we didn’t anticipate but it’s a pretty high class problem to have.

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Edward Aaron – RBC Capital Markets: Then just to follow-up on kind of the recent normalization. So is that to say that, none of these issues will be material to the gross margin in the second quarter?

Steven L. Spinner – President and CEO: When we looked at the gross margin trends which started in the last period of last fiscal year and into the first two periods of this quarter. That’s where we saw the majority of the decline. When we look at P3 of our first quarter, a lot of those margin components normalized to more historical level. So, we have a fair amount of confidence that those issues that we mentioned in the call are behind us.

Edward Aaron – RBC Capital Markets: Then just one last clarification question. If I look at the sequential increase in your balance sheet inventories, it was actually higher than usual this quarter which is little bit surprising given that there were some tight supply issues. How do those things go hand-in-hand?

Steven L. Spinner – President and CEO: Well, I mean, I think that the sales as we mentioned, Ed, the sales coming out of Q4 and into Q1, we saw an acceleration and so – I presume you’re talking from just a straight dollars standpoint?

Edward Aaron – RBC Capital Markets: Yeah, I’m just looking at like the percentage inventory growth from Q4 to Q1 this year versus prior years; it was kind of on the higher end of the range of what we typically see.

Mark E. Shamber – SVP, CFO and Treasurer: Yeah, I mean, so it was a factor of the sales and I think as I mentioned in my comments, we were at 49 days versus being a 52 days last year and a portion of that, last year might have been – we could certainly attribute to the new national customer we had taken on, but certainly we would have probably been happier being a 50 or 51 days of inventory at the end of the quarter, which would have been another $20 million or $25 million higher. So it really is just a reflection of where the sales are running at and trying to get to that level. I mean if you think of it from the standpoint, I’m not sure where you calc is coming up percentagewise, but if you were to think that it should be lower, that might have put us, let’s say, 48 days or 47 days of inventory, which would be relatively tight historically for us going into the holidays. So I understand what you’re saying, but just by virtue of the strength of the sales, even though the jump might have been higher from Q4 to Q1, the sales dictated that we have that higher inventory level and then again we could have used more of it than available.

Guidance

Scott Mushkin – Jefferies and Company: I wanted to go kind of where Ed was going with his first question and just trying to understand what you guys believe normalized operating margins were in the quarter, because if I take out some of these one-time items and I don’t like to give companies a lot of excuses, but I actually do feel like a lot of it what you saw was one-time. And then also, I don’t think you quantified at the strike and the extra cost you took over — the extra cost which you can quantify. I mean, it seems like your operating margins move probably over 3% if we normalize that maybe even higher than that. So, I am wondering that’s a good number and what’s your confidence I know we’ve debated this back and forth on calls for the last year or so that like underneath the hood we are really at a – we are going to see operating margins really turn the corner here and move up because if I look at it seems like they did in the first quarter, I just want to get your comments on that?

Mark E. Shamber – SVP, CFO and Treasurer: I think I’ll start-off, Scott, and then Steve will probably jump in and we will try to cover all those questions, I mean, you did repeat couple parts of that. But as we look at the first quarter and the ways things ended up, certainly what gives us confidence in where the number might have been and we are back to a more normalized run rate is that we saw the gross margin come back in the third period of the quarter to a level that was in line and slightly above where we average for the fourth quarter. So, you can kind of do the math and presume that the other two months of the quarter were lower if we average out to being down almost 50 basis points. So, that’s what gives us the confidence that it is an issue that we can address and we’ve seen the supplier out of stocks moving positively towards the levels that we saw last year and decreasing and so there is optimism that as some of these issues get behind us we’ll get back to sort of normalized gross margin levels and normalized pay out of stocks which given the current demand in the industry should continue to fuel the sales growth.

Steven L. Spinner – President and CEO: Scott, I’ll just add a little more color there. We’ve given long-term guidance on our operating margin which we are still very comfortable with. We delivered some nice operating margin improvement during our last fiscal year and still feel good that we’re going to be able to deliver against those targets. As it relates to the union collective bargaining issue, during the quarter it was about $1 million. We’re really hopeful that we’re going to get that behind us soon. But, it is what it is at this point.

Scott Mushkin – Jefferies and Company: Is that in excess in the gross margins or where is that?

Steven L. Spinner – President and CEO: That’s in the expense side.

Scott Mushkin – Jefferies and Company: My second follow-up question is; I know you said 70% were due to the, I think the out of stocks, but also the technology implementation. So this goes to the technology implementation, the company has had a before Steve you got there, hasn’t had a long track record, I’m following it for a long time, maybe struggling to get technology into its distribution network. You obviously came and your teams come with a great background and getting it done in other places. Is there something different about UNFI that it really causes issues or do you think as you guys learn and move forward that what we’ve seen as far as technology, whether it’s in distribution centers or whether it’s with the logistics network, will these fade over time or is there something more systemic harder about doing it at UNFI?

Steven L. Spinner – President and CEO: I think that’s a good question. First and foremost, I think these decisions that we’re making and these implementations that we’re doing, are really transformational for the Company. Maybe we have a few more disparate systems, maybe they are a little older. But I don’t really view them as being any more difficult of complicated than any that we’ve done in the past. A lot of the issues around IT implementations relate not necessarily to the system but to change management and that is the training of the people, getting them to get on board with the fact that there entire life is going to change because the way they’ve done it for 20 years is going to go away and they are going to have to adjust to a new methodology. So, TMS in particular had to be done, needed to be done and maybe a little bit more complicated than we thought, but not that much. As it relates to the WM implementations it is a little bit more complicated because of the diversity of the systems around the country, whether it’d be in carousels and the systems that we used to manage the carousels whether it’d be in the legacy systems. But we had a tremendous amount of success with Ridgefield. We had a great management team who really took our time, we delayed as you know and in the end we ended up with a terrific implementation. So, I think that’s my general view. Sean, do you have any additional comments you want to make.

Sean F. Griffin – Group President: No, I agree, Steve. Technology of course played a major role in our learnings coming out of Lancaster. We apply those learnings to Ridgefield and we all feel good about where we are in that respect. To put some color behind our Transportation Management System, on any given quarter UNFI moves in the range of 800 million pounds of freight in a fairly complex network. The technology related to TMS has worked as it has intended to work throughout the process. It really has been an iterative change management opportunity to get fully realized and be able to kind of book the returns that we had expected with the system. Looking at again how we have performed since the implementation roll-out June, July versus what it looks like in terms of percentage of freight that we are moving in the income related to the freight. In October we feel pretty good about being on track and business process is really where our opportunity lies and we’ve learned a lot. We are benchmarking the heck out of all of the initiatives that we are rolling out through the supply chain and this one in particular though complex and has taken some time to realize we feel good about it.

A Closer Look: United Natural Foods Earnings Cheat Sheet>>