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Preview: Costs to pull United Natural Foods (UNFI) Q1 earnings down

United Natural Foods Inc. (NYSE: UNFI) is slated to report its earnings results for the first quarter of fiscal 2020 on Wednesday before the market opens. The bottom line will be hurt by cross-selling efforts, new cost efficiencies, debt lowering, and Supervalu acquisition.

The company plans to aggressively pursue new business opportunities to independent retailers. In the future, the Supervalu acquisition will provide additional scale to lower its overall costs. Also, the company will broaden its geographic penetration, expand its customer base, increase its market share, increase operating efficiencies in existing facilities and open new facilities.

Read: American Eagle Outfitters Q3 earnings preview

The company’s business is a low margin business and its profit margins could decline due to intense competition, consolidation in the grocery industry, supernatural chain growth, and increased closures of conventional grocery locations. Apart from this, greater volume discounts and pricing pressures from suppliers and retailers could pressurize the profit margins.

The company assumed about $3.5 billion of debt, including those for refinancing Supervalu and its existing debt. Also, the demand for the company’s products remained sensitive to the economic downturns that impact consumer spending, including discretionary spending, as well as general trends impacting the grocery retail business. The debt repayment and economic downturns are likely to narrow the profitability growth.

Analysts expect the company’s earnings to drop by 55.90% to $0.26 per share while revenue will soar by 101% to $5.76 billion for the first quarter. The company balanced the scale by beating analysts’ expectations twice in the past four quarters while missing estimates twice. The analysts recommended a “hold” rating with an average price target of $8.

Read: Kirkland’s Q3 earnings snapshot

For the fourth quarter, United Natural Foods posted a sharp fall in earnings due to higher operating expenses. Net sales more than doubled aided by solid contributions from Supervalu which joined the United Natural fold last year. Sales at the Supernatural segment advanced 19% and those at Independents grew by 27%, while Supermarkets sales quadrupled.

For fiscal 2020, the management expects earnings to be in the range of $0.35 per share to $0.89 per share. Earnings, on an adjusted basis, are estimated to be in the $1.22-$1.76 per share range. The forecast for full-year net sales is between $23.5 billion and $24.3 billion.

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