United Natural Foods Earnings Call Nuggets: Independent Sector and Shrink Rates

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

Independent Sector

Andrew Wolf – BB&T Capital Markets: Couple questions. First on the independent sector doing a little better; do you think that’s sort of market wide or is that more some of the initiatives you spoke of, adding territory managers and trying to get I guess more touch points with customers in some of the technology and other things you’re trying to bring to the table?

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Steven L. Spinner – President and CEO: It’s kind of hard to pinpoint exactly where it’s coming from but certainly those things you mentioned have helped us quite a bit in terms of getting more feet into the retailer’s locations across the country adding the iUNFI technology, adding some specialists into the market to concentrate on various specific product groups. Certainly, the strength of our Albert’s division as it relates to antibiotic-free all natural protein and specialty cheese. So, I think all those things have really contributed to the growth in the independent channel as well as just the general demand for the product across all the channels.

Andrew Wolf – BB&T Capital Markets: I guess another way or a follow-on to that is, are you actually seeing new customer conversions or is it mainly a penetration either category management or bringing like you mentioned new products to categories?

Steven L. Spinner – President and CEO: I mean, we sell a large percentage of the independents across North America today, and so I think where we’re having a lot more success is through further penetration of SKUs that we either hadn’t had in the past and now have through additional promotional activity, and just the general health of the industry. I would say those are the three things that are driving the growth within that channel. The other thing I’d mention is that, within that channel are what we call multiunit independents, which tend to be extremely fast growing. Actually the fastest growing within that segment. And those are typically independent retailers or retailers that have somewhere north of 10 locations. It seems as though that new openings have ramped up much faster than they have in the last three years…

Andrew Wolf – BB&T Capital Markets: Just wanted to ask about guidance just putting some numbers in the model, looks like Q4 falls out to about 59 to 61. And operating margins kind of flattish year-over-year and I guess, I’m trying to tie that to is that because you’ve increased non-cash earnings impact at Aurora and Talbots Organics or is there something else that accounts.

Mark E. Shamber – SVP, CFO and Treasurer: As we talked about going through year, I mean we are at about 2.6 million through the first nine months of the year and this is the third quarter where we are actually going to move those two facilities, I mean as Steve we’ve actually already done it on the Albert’s facility and will be going through the process very shortly on the Denver facility. So those are, we lose the, we lose the non-cash piece of the rent in the fourth quarter, but then we actually have the physical moves cost, which if you were to go back and look in some cases have been as much as $2 million. So you factor that in on the GAAP side and really that’s what’s any improvements that we are getting on the rest of the business being offset by that being in the guidance for the fourth quarter.

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Andrew Wolf – BB&T Capital Markets: Talked about $2 million of costs?

Mark E. Shamber – SVP, CFO and Treasurer: Yeah. I mean again, we’re at $2.6 million and the guidance for the year was $5 million to $5.5 million, so it could be anywhere from $2.4 million to $2.9 million in the fourth quarter.

Andrew Wolf – BB&T Capital Markets: So I guess another way to ask you, sales guidance went up and yet – I think verses most folk’s models, it looks like margin is not – operating margins – like I said, listen my modeling, it looks little around flattish. So, the guidance here didn’t change, so was there another aspect? Is there a sales mix issue or is there something or you guys just sort of being conservative based on lack of inflation or something you see out there?

Mark E. Shamber – SVP, CFO and Treasurer: Yeah. I mean I think it’s a combination of – there is I mean, one, we continue to see the supernaturals are inlying with historical growth, but the supermarkets’ growth has been much higher than the independents these last two to three quarters, which is driving down the gross margin and driving down the overall margins a little bit. Having covered us for a number of years, we are generally conservative in the guidance from that perspective. So, I think that the combination of the two, plus the move costs, honestly they tend to come in a little bit higher than we envision sometimes. So, we’ve left ourselves a little bit of room if that is in fact the case. I mean they don’t also go up flawlessly even though – the operation’s team does everything. They tend to make sure that happens.

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Shrink Rates

Sean Naughton – Piper Jaffray & Co.: Just on the shrink, you’d called it out as a little bit of direct quarter and I don’t think I caught it that you called it out this quarter. But it does sound like you may be using some technology to track some temperature control in the trailers and maybe just give us an idea, is there a really big opportunity here on shrink? And did that actually improve in the quarter?

Steven L. Spinner – President and CEO: Sean, I don’t remember calling out shrink in the last call. I’m pretty sure we did not. Our shrink rates are actually pretty and have been pretty good. Every once in a while, we get – you know hit, but I don’t remember if there was anything called out on the last couple of quarters related to shrink. I mean we’ve been talking about supplier service issues, but that’s more out of stocks and not inventory loss that related from (out of code), et cetera…

Mark E. Shamber – SVP, CFO and Treasurer: I mean, last year in the first half of the year, we had two successive quarters where we had that in fiscal ’12, but the fiscal ’13, the run rates on the shrink side have been more consistent with historical trend. So, there wasn’t any. And if we did perhaps give that impression, it was not intentional in the second quarter. And also when we talked about — during a very brief period of time, it was basically – we geared up our inventory for the holiday season and that’s what caused some of the very brief shrink issues that we had.

Sean Naughton – Piper Jaffray & Co.: Then private-label, you did also call this one out again that’s been increasing over the first few quarters of this year. Is there any sign of this particular dynamic moderating for you right now, or is this something this is after we get through maybe the next quarter or two here and we should be potentially on a more normalized run rate if you will for that particular portion of the margin expectations moving forward?

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Steven L. Spinner – President and CEO: I mean, this is an old story unfortunately for us. I mean, basically what we see is, we see a big migration to private label. There was some push back and then we see the private label fall off, and then overtime it starts to come back again. So, I think right now we’re in a situation where it is ramping up. So, I think it’ll be a little bit of a drag for maybe the next couple quarters, but it’s not material. It’s just a little bit of the headwind and I think that over time, consumers will ultimately push back and demand more national branded product and falloff again. But right now, we still are in a little bit of an upswing. For clarity, private-label is a net-net price structure whereas nationally branded products are not. So, all-in-all, nationally branded products tend to be more profitable for us to carry than private label…

Sean Naughton – Piper Jaffray & Co.: Just a quick follow-up and you guys have given this a number of times, but where do we stand on the warehouse management over the next 18 months. How many do we expect to have and how many do we have in right now? Tell us what are the some of the performances you’re seeing out of that implementation and rollout?

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Steven L. Spinner – President and CEO: We’ve our third one going into Auburn, Washington this summer, and then we’ll be doing three a year, which I think is a schedule we can keep. We see nice performance increases. The biggest single change that happens when we put in our UNFI warehouse management system is we virtually eliminate our selection errors. So from a selection perspective, we’re almost 100% accurate. But we got to take our time, we got to put it in right, we’ve had huge success in the second implementation in Ridgefield, Washington. So, we feel like we’re pretty good at it. We’ve got a team dedicated to it, and so we’ll not go off through a year following this summer Auburn, Washington.

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