United Natural Foods Earnings Call Nuggets: Increase In Demand and Accounting Details

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

Increase In Demand

Sean Naughton – Piper Jaffray & Co.: Congrats on a strong top line in the quarter. Just in terms of the acceleration that you continue to see here to start the new fiscal year, is it a continuation of similar trends that you’re seeing in the fourth quarter? Or is there something that is really driving that at one of the particular channels at this point in time?

Steven L. Spinner – President and CEO: No, it’s really a continuation of an increase in demand that we saw towards the fourth quarter of last year and it has continued nicely through the beginning of this year. I wouldn’t say that it’s directed at any one particular channel. The acceleration is across all three of the channels that we report against.

Sean Naughton – Piper Jaffray & Co.: Then secondly, and I know you’ve touched on this a number of times, but just thinking about the out-of-stocks and understanding how that impacts your gross margin, how would you – and I know that in Q1 here that that was called out as little bit of an impact in your last year, how much would you say that that impacted your ability to maintain or expand margins in 2013? I mean what, kind of, gives you some of the confidence that this may normalize post-holiday?

Steven L. Spinner – President and CEO: I mean if you think about what happens when the – we’re always going to have a certain amount of supplier out-of-stocks just in nature of the beast. What happens is when it accelerates beyond historical levels I mean the biggest loss is the lost gross margin on the sales that we lose because we don’t have the inventory. But there is also a fair amount of promotional gross margin that we lose related top those lost sales as well as freight revenue and a whole slew of other things that just don’t take place when we don’t have the inventory. I think we quantified the amount at some point during the last year. We had said that the out-of-stocks were about 100 basis points worse year-over-year in our third and fourth quarter of last year.,,

Mark E. Shamber – SVP, CFO and Treasurer: Yeah, I mean we varied depending on where they’ve been, but when we talked about the third quarter, we referenced that we lost about $17 million in sales in the third quarter and when we had the first quarter earnings call back in late November or early December of 2012 I think we had referenced about $25 million in lost sales there. We didn’t break it out in Q2, but we did break it out in those two quarters.

Steven L. Spinner – President and CEO: I think it is important to note that we have seen some improvement over the last month or so. I think that we’ll probably prepare for a rocky road through the holidays, but we’re still optimistic that we’ll get it back to more historic levels in January, February.

Sean Naughton – Piper Jaffray & Co.: Then just a quick clarification Mark maybe on Q4. If you remove the impact of the accounting treatment for the Denver facility, could you say the margin expense will be closer to about 5 basis points, is that the correct way to read it?

Mark E. Shamber – SVP, CFO and Treasurer: On the operating margin?

Sean Naughton – Piper Jaffray & Co.: Yes, correct.

Mark E. Shamber – SVP, CFO and Treasurer: Yes.

Sean Naughton – Piper Jaffray & Co.: Thank you very much…

Mark E. Shamber – SVP, CFO and Treasurer: Actually – well, before we take the next question, I mean the one thing I would add, Sean, is that the benefit would have been spread over the other quarters. So, I mean, as much as it’s all concentrated in one quarter, that benefit still would have been reflected during the course of the year; just wouldn’t have been in one quarter.

Accounting Details

Andrew Wolf – BB&T Capital Markets: So, as a follow-up on the accounting, so the first Q1 through Q3, your auditor said they wanted that reversed out, is that how we should look at it?

Mark E. Shamber – SVP, CFO and Treasurer: Yeah, I mean, it’s – I could probably take up 15 minutes of the call to actually – and exactly what went on, but…

Andrew Wolf – BB&T Capital Markets: Is it close enough for horseshoes, was that what happened?

Mark E. Shamber – SVP, CFO and Treasurer: So, basically, we reversed some of it out; some of it is now below the line in interest expense or it led to increased interest expense. And that’s when we were talking about the fiscal 2014, we’ll still have the total amount of expense per year going forward, but a portion of it will be above the line in operating expenses, and a portion will be below the line in interest expense. But there is no net change in the amount of money that we’re expensing or incurring.

Steven L. Spinner – President and CEO: And just under $0.03 in EPS.

Mark E. Shamber – SVP, CFO and Treasurer: $0.03 for the quarter.

Andrew Wolf – BB&T Capital Markets: There was $0.03 charge to this quarter?

Steven L. Spinner – President and CEO: Benefit.

Mark E. Shamber – SVP, CFO and Treasurer: Benefit.

Andrew Wolf – BB&T Capital Markets: Benefit, okay. And that’s the offset. But what was the net for the year, because you did bring up your interest expense. There was some net cost to the move rent?

Mark E. Shamber – SVP, CFO and Treasurer: Yeah, I mean, I don’t have it – I know the increase on the interest expense was $600,000; I don’t know what the net rent expense for Denver was off the top. Maybe you’ll have to follow-up with…

Andrew Wolf – BB&T Capital Markets: I’m just trying to figure out sort of the negative swing. And you called out next year a couple of million; $2.2 million or something?

Mark E. Shamber – SVP, CFO and Treasurer: Yeah, it’ll be about $2.5 million next year. It’s a shift next year. It will move from operating expenses to interest expense.

Steven L. Spinner – President and CEO: That’s all reflected in our guidance.

Mark E. Shamber – SVP, CFO and Treasurer: Right.

Andrew Wolf – BB&T Capital Markets: Alright. So, on the operating line, the margins as adjusted at a 5 basis point expansion, that’s how we should think of modeling and so forth?

Mark E. Shamber – SVP, CFO and Treasurer: Yes.

Andrew Wolf – BB&T Capital Markets: There’s nothing – okay, it’s all going through interest expense now, and some rent expense we’re not going to see. What about this duplicate rent you’re paying? Could you tell us what that is because that’s just dead rent on an empty warehouse?

Mark E. Shamber – SVP, CFO and Treasurer: Yeah, we – if we talked about – we will move from three buildings or four buildings in Denver to a new location, not all of those leases end at the same time. So we’re going to be paying rent expense, CAM charges, have minimal electricity and water for those buildings until the leases end. Some of them end as soon as six months, some of them don’t end for another two and a half…

Steven L. Spinner – President and CEO: But again, it’s important to note – we’re very particular here in that – we called them out just to give you the data but all these things are reflected in our guidance.

Andrew Wolf – BB&T Capital Markets: I know, I just want to know, I mean when a company is paying rent for an empty building, its real money, but it’s also not part of your ongoing earnings because it’s going to go away at some point. Is that a couple of million or can you just give us a sense of what it is?

Mark E. Shamber – SVP, CFO and Treasurer: It’s about – it’s anywhere from $1.4 million to $1.8 million for next year.

Andrew Wolf – BB&T Capital Markets: A bigger picture question, hopefully for Steve. There’s so much consolidation going on in supermarkets, whether it’s SUPERVALU being sold to private equity, Harris Teeter to strategic; Fresh & Easy and Piggly Wiggly in the last couple days, strategic, and one private equity. Is this an opportunity for – I mean, I’m sure each one is different, but when you look at it as a whole, is this an opportunity because things are being shaken? Or is it more like either these assets are changing and they’ve got to sort of settle into their new ownership structure and maybe plans that might’ve been happening are on hold? Can you give us a sense of how you are viewing the current consolidation for and how it might affect UNFI?

Steven L. Spinner – President and CEO: I mean I think the answer, short answer is, yes to all the above. But I think generally it creates an opportunity for us, because there is enough (empirical) data that says that we know how to do this, and certainly a lot of the supermarket customers that have made the switch over the last couple years or seeing a benefit of that, in their increased consumption in organic and natural and you are certainly seeing it in our overall supermarket sales growth. And for the most part, we have relationships with most of these customers and I think generally we look at it as an opportunity. It’s certainly not a negative.