While UNFI posted better than expected earnings in its third quarter, there are lingering signs that the Providence, RI distributor still faces many critical challenges as it attempts to blend full-line wholesaler Supervalu into its business. UNFI acquired the Eden Prairie, MN company last October for $2.9 billion, and according to many analysts has been slow to integrate core functions into its business that has led to frustration and unhappiness with some associates and many of its independent customers, who provided the backbone of the deal.

In fact, during its post-earnings conference call with financial analysts, UNFI COO (and Supervalu CEO) Sean Griffin addressed the negative 3.6 percent decline in Supervalu’s overall sales.

“Largely the declines are coming from the center store and specifically our independent supermarket customer center store. So there is a lot of competition at retail. I think everyone is aware of that. And customers, our customers that are investing in their formats are winning and the customers frankly that are not necessarily investing are struggling. And frankly, some of what we’re seeing is really the catalyst for why we’re putting our companies together. The customers that frankly are struggling in the center store, they need our help. And where they need our help is in better-for-you food. It’s in differentiated food. And frankly, we bring an assortment to the game that is second to none. It’s just — it’s just going to take a little time. So we’re disappointed. I certainly am disappointed in the negative 3.6 percent, but we’ve got many, many customers that are winning and doing quite well,” the veteran UNFI executive said on the analysts call.

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Griffin also admitted that the company has been adversely impacted by challenges at its new Harrisburg, PA distribution center (which opened last October), noting that those difficulties have led to higher labor, transportation and shrink costs.

Another challenge that the company has encountered is the selling/closing of its 44 remaining Shoppers Food & Pharmacy in the Baltimore-Washington area which have been on the block since UNFI completed the Supervalu purchase nearly 9 months ago. Multiple sources have told us that the process has been developing slowly with many of the stores either receiving low bids or no bids. Also in play, according to our sources, is Shoppers’ underfunded pension liability plan which is now controlled by UNFI. Unless a unionized buyer is willing to assume that liability (reportedly more than $100 million), that financial albatross would remain on UNFI’s balance sheet.

CEO Steve Spinner, during the conference call, pretty much repeated his previous progress report by stating, “With regards to Shoppers, we continue to work with various potential buyers and we’ll keep you updated as progress is made.”

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On the balance sheet, in its third quarter which ended on April 27, UNFI’s operating income was $69.7 million, reflecting a benefit from the goodwill impairment charge adjustment of $38.3 million and restructuring, acquisition, and integration related expenses of $19.4 million.  When excluding these items, operating income was $50.9 million, or 0.85 percent of net sales, in the third quarter of fiscal 2019.  Operating income in the third quarter of fiscal 2018 was $82.2 million, or 3.10 percent of net sales, and included restructuring charges of $0.2 million.  When excluding these charges, operating income for the third quarter of fiscal 2018 was $82.3 million, or 3.11 percent of net sales.  The decrease in adjusted operating income, as a percent of net sales, was driven by lower gross margins, as a percent of net sales, and higher operating expenses, including depreciation and amortization expense resulting from the Supervalu acquisition, as a percent of net sales.

Perhaps unintentionally cryptic, Spinner summarized the status of UNFI’s current state.

“Our transformational journey continues,” he proclaimed. “And I’m proud of what our team has accomplished this quarter,” he proclaimed. I am excited about our next chapter and the acceleration of value creation we expect to realize from the scale, services and assortment that only UNFI can deliver.

When UNFI announced it had agreed to acquire Supervalu in late July 2018, its stock was trading at $41.73. As of mid-day on June 6, UNFI’s share price was $9.73.