UNFI FY 2Q17 Earnings Call Notes

Steven Spinner – Chairman and Chief Executive Officer

Ongoing challenges faced by deflation

“And while we are encouraged by these initiatives, we also have to acknowledge the ongoing challenges facing our industry. Our customers are facing a difficult retail environment due to deflation and increased competition. We view deflation as cyclical, inflation will come back at some point but while it’s here, it’s leading to some very real challenges for us and our retail customers. Many of our broadline customer contracts are on a cost plus basis, so when we have less inflation or deflation, the gross profit dollars we generate for case is lower.”

Outlook incorporates little to no improvement in inflation

“We believe our outlook incorporates the ongoing industry challenges, including heightened competition and little to no meaningful improvement in inflation. But at the same time, it reflects our continued commitment and confidence in our strategic initiatives, strength in our new customer pipeline and growth opportunities with our retail partners.”

Deflation is cyclical

“Well Eric, the issue that we have and it is cyclical. I mean obviously it is not going to last forever is that the produce deflation got worse in the second quarter than it was in the first. And so, in the produce world, as the product deflates we still incur the same amount of cost to get the products from the DCs into the retailers. Yes, we have considerably less gross margin to cover the cost. And so, it is a short term issue, and misery loves company; everybody has got the same problem. As far as when it’s going to cycle through, your guess is as good as mine, the only thing I would say is we have a high degree of confidence that is not going to be forever, it will turn but we are just not sure when.”

Would rather buy companies doing well than struggling

“Yes I mean that’s true. I think the challenge for us is we typically don’t like to acquire turnarounds or companies that are financially troubled. We’d rather pay a fair price for a company that’s doing well than a very inexpensive price for a company that’s not doing well. Now the exception to that might be a company that’s recently struggling, that’s small that we can close and put into one of our existing distribution centers but generally we would acquire the healthy companies first.”

Increasingly doing direct to consumer fulfillment for customers

“Yes actually you are right in that we can’t sell direct to consumers as UNFI one of our fastest growing platforms to sell direct to consumers on behalf of our retailers. So essentially becoming the endless aisle for a retail partner where they are looking to expand their product offering to their consumers, we are doing that today, it’s just the consumer doesn’t know that we exist. We’re just doing the back-of-the-house fulfillment. We have a network of e-commerce fulfillment centers across the country. We’re adding to it, so that we get it to our customers in the most efficient and cost-effective manner. So we’re investing in e-commerce’s platform and we certainly spend a lot of time with some of the larger e-commerce providers to ensure that we have – we’re have were giving them access to all of the fresh and vitamin supplements in center store gluten-free organic et cetera as we possibly can. ”

Michael Zechmeister

Inflation outlook is lower

Yes and Steve, this is Mike. You asked a little bit about forward looking. It’s often difficult to forecast where deflation or inflation is going, but we would say the outlook for the remainder of the year would be in the range of minus 0.5% to plus 0.5% which is down about 25 basis points from where we were thinking last quarter