Nov 30, 2012
Operator
Good day, ladies and gentlemen. Thank you for standing by.
Welcome to the United Natural Foods Fiscal 2013 First Quarter Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Scott Eckstein from Financial Relations.
Please go ahead.
Scott Eckstein
Thank you, operator, and good morning, everyone. By now, you should have all received a copy of this morning's press release.
If anyone still needs a copy, please contact Joe Calabrese in our New York office at (212) 827-3772, and we'll send you a copy immediately following this morning's conference call.
Scott Eckstein
With us this morning from management is Steve Spinner, President and Chief Executive Officer; Mark Shamber, Chief Financial Officer; and Sean Griffin, Group President. We will begin this morning with opening comments from management, and then we will open the line for questions.
As a reminder, this call is also being webcast today and can be accessed over the Internet at www.unfi.com.
Scott Eckstein
Before we begin, as usual, we would like to remind everyone about the cautionary language regarding forward-looking statements contained in the press release. That same language applies to comments made on this morning's conference call.
Scott Eckstein
Additionally, in today's press release and on today's call, we provide both GAAP and non-GAAP financial measures, including operating expenses, operating income, net income and earnings per diluted share. The presentation of these non-GAAP financial measures is not intended to be considered in isolation or as a substitute for any measure prepared in accordance with GAAP.
For a complete reconciliation of GAAP to non-GAAP financial measures, please refer to our earnings release issued earlier today available on our corporate website, www.unfi.com, under Investors.
Scott Eckstein
With that, I'd like to turn the call over to Steve Spinner. Steve, please go ahead.
Steven Spinner
Thanks, Scott. Good morning, everyone, and thank you again for joining us this morning to discuss UNFI's first quarter fiscal 2013 results.
We had quite a bit going on during this quarter, which we will discuss in detail this morning. In particular, our continued sales growth highlighted by increased demand for organic natural and specialty products, unusually high supplier out of stocks, continued shift in our customer mix, onetime expenses associated with closing out a multi-state unclaimed property audit and a brand impairment, continued expense control driven by increases in productivity.
And despite all the moving parts, which I'll discuss shortly, during the quarter our net sales increased to almost 16% to another record of $1.4 billion, and our adjusted diluted EPS grew 16.1% to $0.46. Additionally, adjusted net income grew by 17.8%.
Steven Spinner
The significant expenses, which we will address today are, in fact, onetime events. And we believe the gross margin challenges we experienced this quarter are now predominantly behind us.
On the sales side, consumers drove continued demand for our products. In addition, we were positively impacted by 3 acquisitions made during the quarter
One in Canada, one by our Albert's Organics division and one new e-commerce business, all of which we have previously disclosed. Net of these acquisitions, our net sales grew by almost 15% over the first quarter of 2012.
On the sales side, consumers drove continued demand for our products. In addition, we were positively impacted by 3 acquisitions made during the quarter
And it's important to note that we have now lapped our national customer, which was onboarded last October. And as a result, net sales growth will moderate by approximately 3% to 4% for the balance of the year.
On the sales side, consumers drove continued demand for our products. In addition, we were positively impacted by 3 acquisitions made during the quarter
During the first quarter, UNFI saw for the first time a significant increase in the rate of supplier out of stocks causing negative pressure on our gross margin and topline sales. I'll address the gross margin implications shortly.
On the sales side, consumers drove continued demand for our products. In addition, we were positively impacted by 3 acquisitions made during the quarter
On the top line, our supplier outs during the first quarter were approximately 25 million greater than prior year. The higher out of stocks were caused primarily by ingredient shortages and high demand to support the holiday season.
While difficult to manage, we are confident that the higher outs will subside and return to a more normalized rate over the next several months.
On the sales side, consumers drove continued demand for our products. In addition, we were positively impacted by 3 acquisitions made during the quarter
Looking at gross margin, we finished the quarter at 16.7%, which represents 110-basis-point decline from the prior year's first quarter. And as you know, gross margin is an important line item for UNFI as more of our business comes from conventional retailers.
On the sales side, consumers drove continued demand for our products. In addition, we were positively impacted by 3 acquisitions made during the quarter
During the first quarter, we faced several challenges affecting our gross margin. The implementation of our transportation management system or TMS, loss gross profit on supplier out of stocks and diminished trade spend, increased freight cost to move product needed to support customer demand and customer mix shift.
On the sales side, consumers drove continued demand for our products. In addition, we were positively impacted by 3 acquisitions made during the quarter
During the last quarter, I talked about the implementation of our TMS system. This system is critical to our management of supply chain logistics, moving product from point of manufacture to the UNFI distribution centers.
And the disruption that I mentioned during the last call related not to the system itself but to change management and training. And during the first several weeks of our first quarter, this disruption continued as we moved towards completion of this initiative.
The conversion to our new system led to instances which caused us to move freight through outside carriers versus our own fleet. And this system is imperative to our ability to manage increasing amounts of freight through a complicated and demanding network.
The majority of our freight issues occurred during July of Q4 2012 and August and September of this fiscal year. Our key indicators monitoring freight and overall gross margin returned to normalized levels during October.
On the sales side, consumers drove continued demand for our products. In addition, we were positively impacted by 3 acquisitions made during the quarter
Also negatively affecting gross margin during the period were higher-than-anticipated supplier out of stocks. And as I mentioned earlier, these outs were approximately $25 million more than prior year.
This translated into approximately $4.2 million of loss margin during the quarter.
On the sales side, consumers drove continued demand for our products. In addition, we were positively impacted by 3 acquisitions made during the quarter
Additionally, similar to holiday periods in the past, UNFI moved product around the country at our expense to ensure that we delivered exemplary store rates to our retailers. As an example, these situations occur when we run short of product in California but have inventory in Connecticut.
We make the choice to move the freight across the country to meet the demand at our cost.
On the sales side, consumers drove continued demand for our products. In addition, we were positively impacted by 3 acquisitions made during the quarter
The challenge in this period was higher levels of supplier outs, which translated into more freight being moved, again at our cost. These issues represented the majority of our gross margin decline during the period.
And over 70% of our gross margin decline in the period related to TMS implementation, increased freight costs and increased supplier out of stocks.
On the sales side, consumers drove continued demand for our products. In addition, we were positively impacted by 3 acquisitions made during the quarter
So let's talk now about the expense side of our business during the quarter. During the quarter, we terminated a licensing agreement with a brand managed by our Blue Marble division, which resulted in an impairment of $1.6 million to the associated intangible asset.
Adjusting both for the intangible impairment in this quarter and the nonrecurring expenses from prior year related to new customer onboarding and the divestiture of our nonfood's business, our operating expenses decreased 110 basis points. Our productivity continues to increase as we strive for efficiency throughout our warehouses.
Our Ridgefield, Washington facility is running quite well on our new warehouse management system, and we are continuing to evaluate the next distribution center for implementations. I continue to be optimistic and quite pleased with the achievements of our supply chain and logistics teams in driving towards expense control while always focusing on service excellence and accuracy and on-time delivery and safety.
On the sales side, consumers drove continued demand for our products. In addition, we were positively impacted by 3 acquisitions made during the quarter
During the quarter, UNFI continued to experience significant contingency planning costs related to the expiration of its contract with UNFI Seattle, Washington workforce. And as we've discussed in prior calls, our contract expired in March of 2012.
We've negotiated in good faith for 8 months to secure a mutually beneficial resolution.
On the sales side, consumers drove continued demand for our products. In addition, we were positively impacted by 3 acquisitions made during the quarter
During September, the union authorized a strike. UNFI incurred significant costs to ensure continued high level of service to our customers.
We hope that this issue is resolved shortly. However, we expect to continue to incur additional costs until an agreement is made.
And it's important to remember that less than 5% of UNFI's associates are unionized and we will always ensure that pay rates and benefits are consistent and competitive across all of our distribution centers and divisions.
On the sales side, consumers drove continued demand for our products. In addition, we were positively impacted by 3 acquisitions made during the quarter
A couple of comments on Hurricane Sandy. I can't even begin to tell you how proud I am of our teams throughout the Northeast.
They prepared and worked around the clock to ensure that our people were safe and customers received critical deliveries prior to and following the storm. We had limited disruption, which was caused primarily by power outages.
However, because of the teams' preparations, we anticipate costs of no more than $500,000 during the second quarter. Many of our associates did have considerable damage to their property, and we are working closely with them to ensure that they receive adequate time and resources to repair and rebuild.
On the sales side, consumers drove continued demand for our products. In addition, we were positively impacted by 3 acquisitions made during the quarter
Capital expenditures during the quarter consisted primarily of maintenance related costs. And we are on target to build 3 new centers over the next several years and continue to target the Northeast, Midwest and Pacific regions in order to accommodate growing demand.
And previously, we addressed this issue by commenting on the increased capital expenditures as a percentage of sales during the next several years increasing from less than 1% of sales to less than 1.3% of sales.
On the sales side, consumers drove continued demand for our products. In addition, we were positively impacted by 3 acquisitions made during the quarter
And also during the quarter, UNFI settled a multi-state unclaimed property audit, related primarily to a 2007 acquisition. And Mark is going to provide a lot more detail on this shortly.
On the sales side, consumers drove continued demand for our products. In addition, we were positively impacted by 3 acquisitions made during the quarter
During the quarter, several divisions had exemplary performance. Our Albert's Organics division delivered high growth and return as they continue to expand their organic produce and perishable perimeter business.
Demand for these products continues to outpace our core organic natural and specialty foods business. Also, Select Nutrition continues to improve as more and more consumers choose to purchase natural supplements and personal care over the web.
Both Albert's and Select Nutrition are integrating previously-acquired Purity Organics and Honest Green.
On the sales side, consumers drove continued demand for our products. In addition, we were positively impacted by 3 acquisitions made during the quarter
And we had lots going on during this quarter. With 16% sales growth, we remain bullish on continued demand for our products and services.
And with the onetime issues we discussed today behind us, we are confident that UNFI is on track to achieve our 2013 guidance. Now I'll turn the call over to Mark to comment some more on the financials.
Mark?
Mark Shamber
Thanks, Steve, and good morning, everyone. Net sales increased by 15.8%, or $192.6 million to $1.41 billion for the first quarter of fiscal 2013 versus net sales of $1.22 billion in the prior year.
The 3 first quarter acquisitions we announced on our fourth quarter conference call in September positively impacted net sales by $11.2 million in the quarter. Excluding the impact of these acquisitions, net sales increased by $181.4 million or 14.9%.
Mark Shamber
Inflation decreased sequentially again to 2.15%, a decline of 86 basis points from the fourth quarter of fiscal 2012 and a 170-basis-point decline over the first quarter of fiscal 2012. However, we did note that, while inflation declined sequentially, there was a modest increase in October as a couple of our larger suppliers increased their prices in the month of October.
Mark Shamber
For the first quarter of fiscal 2013, the company reported adjusted net income of $22.8 million, or $0.46 per diluted share. Excluding the impact of the items disclosed in this morning's press release, an increase in adjusted net income of approximately 17.8%, or $3.4 million over the prior year.
Adjusted net income for the first quarter of fiscal 2012 was $19.4 million, or $0.40 per diluted share.
Mark Shamber
On a GAAP basis for the first quarter of 2013, net income was $21.5 million, or $0.43 per diluted share, an increase of 42% over fiscal 2012's first quarter GAAP net income of $15.2 million.
Mark Shamber
In the first quarter, sales to the supernatural channel increased by 16.4% over the prior year's first quarter and supernaturals represented 36% of sales for the quarter. Independent sales rose by 9.4% year-over-year and independents represented approximately 34% of sales.
Our supermarket channel experienced growth of 25.6% over the prior year and now represents approximately 25% of sales. And food service grew by 24.2% over the prior year and continues to represent approximately 3% of the sales.
Mark Shamber
Excluding the impact of the acquisitions, supermarket sales increased by 22.2%, while independent sales growth was 9%.
Mark Shamber
Gross margin for the quarter was 16.7%, which represents 110-basis-point decline from the first quarter of fiscal 2012, which had a gross margin of 17.8%. Our gross margin for the first quarter of fiscal 2013 was negatively affected by higher supplier out of stocks and increased inbound freight costs, some of which were incurred as part of our efforts to maintain higher service levels for our customers, as Steve just mentioned, which together, represented approximately 70% of the year-over-year decline.
Also, the continued shift in our customer mix towards the supernatural and conventional supermarket channel along with changes in our product mix negatively impacted gross margin in the quarter.
Mark Shamber
GAAP operating expenses for the first quarter represented 14.1% of sales, a 155-basis-point improvement compared to 15.7% for the same period last year. Adjusted operating expenses for the first quarter of fiscal 2013 represented 14% of net sales, compared to 15.1% of net sales in the first quarter of fiscal 2012, a 110-basis-point improvement.
Details of the adjustments to operating expenses in both years were provided in this morning's press release.
Mark Shamber
Fuel had a positive impact of 5 basis points in operating expenses in comparison to the first quarter of fiscal 2012, as fuel represented 82 basis points of distribution net sales in the first quarter of fiscal 2013, consistent with the fourth quarter of fiscal 2012. Nationally, our diesel fuel costs in the first quarter of fiscal 2013 increased by approximately 4.3% from the prior year's first quarter, while national average prices increased to $4.07 a gallon, an increase of 6.4% compared to the $3.82 a gallon in the first quarter of fiscal 2012, per the Department of Energy.
Mark Shamber
Noncash straight-line rent expense associated with our Aurora, Colorado distribution facility under construction was approximately $0.8 million in the quarter. Share-based compensation expense during the quarter was $4.7 million, or 33 basis points, compared to $3.9 million or 32 basis points in the prior year.
Mark Shamber
Adjusted operating income for the quarter was 2.7% in both fiscal years. On a GAAP basis, operating income was 2.6% for the quarter, an increase of 45 basis points over the prior year's fourth -- first quarter GAAP operating income of 2.1%.
Mark Shamber
This quarter, we reached an agreement in principle to settle a multi-state unclaimed property audit, related primarily to our 2007 acquisition of Millbrook Distribution Services Inc. This agreement resulted in a onetime charge of $4.9 million reflected in our Other Expense line.
We recently finalized a settle agreement -- a settlement agreement and expect to make payment during the second quarter.
Mark Shamber
In addition, our provision for income taxes reflected a discrete tax benefit of $2.7 million in the quarter, primarily related to the reversal of reserves for uncertain tax positions. As a result, our effective tax rate for the quarter was approximately 30.5%.
Excluding these discrete items, we would expect our effective income tax rate to be in the range of 39.5% to 40% for fiscal 2013.
Mark Shamber
At just under $720 million at quarter end, our inventory averaged 49 days for the first quarter, a decrease of 3 days from the first quarter of fiscal 2012, when we were at 52 days as we built inventory in anticipation of taking on a new national customer. The primary driver behind the lower average days on hand was the high level of out of stocks across our supplier base.
DSO for the first quarter was about a day better than the fourth quarter at 21 days, which is favorable to our target range and consistent with the prior year.
Mark Shamber
Capital expenditures were $4.6 million, or 32 basis points in net sales for the 3 months just ended, which is below our target rate as a greater portion of our CapEx is planned for the remainder of fiscal 2013 as we finish our new Aurora, Colorado distribution facility and complete other initiatives.
Mark Shamber
Outstanding commitments under our credit facility were $183 million at quarter end with available liquidity of $308 million, including cash and cash equivalents.
Mark Shamber
Our leverage increased to approximately 0.7x on a trailing 12-month basis due to our normal seasonal investment in inventory going into the holidays and the corresponding increase in debt.
Mark Shamber
At this point, I will turn the call back over to the moderator for the question-and-answer session.
Operator
[Operator Instructions] Our first question comes from the line of Ed Aaron from RBC Capital Markets.
Edward Aaron
See, I guess, you've had a few things kind of go against you so far this year, just between the stockouts, the TMS issue and then some expenses maybe with Sandy. It sounds like things have normalized, but you have a little bit of a hole to dig out of, particularly on the gross margin side, I just was curious to know if there are any sort of incremental offsets on the positive side that keep you confident in your full year ranges.
Mark Shamber
Yes, I mean, I think that we continue to see nice improvement in our productivity and our expense control around the country. And that was evident in this quarter in particular.
And I think we'll continue to see that. The top line sales, for sure, is a terrific positive that we certainly think is going to continue throughout the year and that will really help us.
So I think those are the 2 primary drivers that I can think of. It's a terrific time to be in the industry.
Yes, we had a higher degree of supplier out of stocks that we didn't anticipate. But it's a pretty high-class problem to have.
Edward Aaron
Fair enough. And then just a follow-up on kind of the recent normalization.
So is that to say that none of these issues will be material to the gross margin in the second quarter?
Mark Shamber
We -- when we looked at the gross margin trends, which kind of started in the last period of last fiscal year and into the first 2 periods of this quarter, that's where we saw the majority of the decline. When we look at P3 of our first quarter, a lot of those margin components normalized to more historical levels.
So we have a fair amount of confidence that those issues that we mentioned in the call are behind us.
Edward Aaron
Okay. And then just one last kind of clarification question.
If I look at the sequential increase in your balance sheet inventories, it was actually higher than usual this quarter, which is a little bit surprising, given that there were some tight supply issues. How do those things kind of go hand-in-hand?
Mark Shamber
Well, I mean, I think that the sales, as we mentioned, Ed, the sales coming out of Q4 and into Q1, we saw an acceleration. And so I presume you're talking from just a straight dollar standpoint?
Edward Aaron
Yes. I'm just looking at, like, the percentage inventory growth from Q4 to Q1 this year versus prior years.
It was kind of on the higher end of the range of what we typically see.
Mark Shamber
Yes. I mean, it was a factor of the sales.
And I think, as I mentioned in my comments, we are at 49 days versus being at 52 days last year. And a portion of that last year might have been -- we can certainly attribute to the new national customer we had taken on.
But certainly, we would have probably been happier being at 50 or 51 days of inventory at the end of the quarter, which would have been another $20 million or $25 million higher. So it really is just a reflection of where the sales are running at and in trying to get to that level.
I mean, if you think of it from the standpoint, I'm not sure where your calc is coming up percentage wise, but if you were to think that it should be lower, that might have put us at say 48 days or 47 days of inventory, which would be relatively tight historically for us going into the holidays. So I understand what you're saying.
But just by virtue of the strength of the sales, even though the jump might have been higher from Q4 to Q1, the sales dictated that we have that higher inventory level. And again, we could have used more if it had been available.
Operator
And our next question comes from the line of Scott Mushkin from Jefferies & Company.
Scott Mushkin
I wanted to go kind of where Ed was going in his first question. I'm just trying to understand what you guys believe normalized operating margins were in the quarter because if I take out some of these onetime items, I don't like to give companies a lot of excuses, but I actually do feel like a lot of what you saw was onetime.
And then also, and I don't think you quantified that the strike and the extra costs, you took all of the extra costs but you didn't quantify them. I mean, it seems like your operating margins were probably over 3% if we normalize stuff, maybe even higher than that.
And so I'm wondering that's a good number and what's your confidence? I know we have debated this back and forth on calls for the last year or so that we're all -- like underneath the hood, we're really at a -- we are going to see operating margins really turn the corner here and move up.
Because if I look at it, it seems like they did in the first quarter. I just want to get your comments on that.
Mark Shamber
Yes. I mean, I think I'll start off, Scott.
And then Steve will probably jump in and we will try to cover all those questions. I may need you to repeat a couple parts of that.
But as we look at the first quarter and the way things ended up, certainly what gives us confidence in where the number might have been and that we're back to a more normalized run rate is that we saw the gross margin come back in the third period of the quarter to a level that was in line and slightly above where we averaged for the fourth quarter. So you can kind of do the math and presume that the other 2 months of the quarter were lower if we averaged out to being down almost 50 basis points.
So that's what gives us the confidence that it is an issue that we can address. And we've seen the supplier out of stocks moving positively towards the levels that we saw last year -- and decreasing.
And so there is optimism that as some of these issues get behind us, we will get back to sort of normalized gross margin levels and normalized supplier out of stocks, which, given the current demand in the industry, should continue to fuel the sales growth.
Steven Spinner
And Scott, I'll just add a little more color there. We've given long-term guidance on our operating margin, which we are still very comfortable with.
We delivered some nice operating margin improvement during our last fiscal year and still feel good that we're going to be able to deliver against those targets. As it relates to the union collective bargaining issue, during the quarter, it was about $1 million.
We're really hopeful that we're going to get that behind us soon. But it is what it is at this point.
Scott Mushkin
And is that and it sits in the gross margins or where is that? I think I should know.
Steven Spinner
That's in the expenses.
Scott Mushkin
Okay, so $1 million. And then my second follow-up question is, and I know you said 70% were due to the, I think, the out of stocks but also the technology implementation.
And so this goes to the technology implementation. I mean, the company has had a -- before even Steve you got there -- has had a long track record -- I've been following it for a long time -- of really struggling to get technology into its distribution network.
You obviously came and your teams come with a great background in getting it done in other places. Is there something different about UNFI that it really causes issues?
Or do you think as you guys learn and move forward that what we have seen as far as technology or whether it's in distribution centers or where whether it's with the logistics network, will these fade over time? Or is there something more systemic, harder about doing it at UNFI?
Steven Spinner
Yes. I mean, I think, that's a good question.
I mean, first and foremost, I mean, I think these decisions that we are making and these implementations that we are doing are really transformational for the company. Yes, maybe we have a little few more disparate systems, maybe they're a little older.
But I don't really view them as being any more difficult or complicated than any that we've done in the past. A lot of the issues around IT implementations relate not necessarily to the system but to change management and that is the training of the people, getting them to get on board with the fact that their entire life is going to change, because the way they've done it for 20 years is going to go away and they're going to have to adjust to a new methodology.
So TMS, in particular, had to be done, needed to be done. Maybe a little bit more complicated than we thought, but not that much.
As it relates to the WM implementations, it is a little bit more complicated because of the diversity of systems around the country, whether it be in carousels and the systems that we use to manage the carousels, whether it be in the legacy systems. But we had a tremendous amount of success with Ridgefield.
We had a great management team. We really took our time.
We delayed it, as you know. And in the end, we ended up with a terrific implementation.
So I think that's my general view. Sean, do you have any additional comments you want to make?
Sean Griffin
Yes, no. I agree, Steve.
Technology, of course, played a major role in our learnings coming out of Lancaster. And we applied those learnings to Ridgefield and we all feel good about where we are in that respect.
To put some color behind our -- the transportation management system, on any given quarter, UNFI moves in the range of 800 million pounds of freight in a fairly complex network. The technology related to TMS has worked as it is intended to work throughout the process.
It really has been an iterative change management opportunity to get fully realized and be able to kind of book the returns that we had expected with the system. Looking at, again, how we have performed since the implementation rolled out in June and July, versus what it looks like in terms of the percentage of freight that we're moving and the income related to that freight in October, we feel pretty good about being on track.
And business process is really where our opportunity lies. And we've learned a lot.
We are benchmarking the heck out of all of the initiatives that we are rolling out through the supply chain and this one, in particular, though complex and has taken some time to realize, we feel good about it.
Operator
And our next question comes from the line of Meredith Adler from Barclays.
Meredith Adler
I guess I have a couple of questions. I didn't quite hear what you said about how many of your employees are unionized.
I think you said 5%?
Steven Spinner
Yes, that's less than 5%.
Meredith Adler
Okay. But I was just wondering, what would be the strategy, the longer-term strategy in terms of dealing with this kind of labor difficulty even though it's limited to one area.
How do you approach it?
Steven Spinner
Yes. I mean, I think it would be inappropriate to get into a discussion about UNFI's relationship with a single bargaining unit.
We've had a 20-year great relationship with this local. We feel as though we've put out a very reasonable offer to get this thing resolved.
And for one reason or another, we just can't get there. So all we can do is continue to negotiate, but continue to negotiate in a way that says we are just never going to be in a position to offer a collective bargaining unit, a benefit compensation package that goes beyond what we do for the rest of our associates across the country.
Meredith Adler
Okay, that's fair. And I should have known better that you're not going to talk about it while it is still going on.
Another question I have is in terms of the out of stocks, they sounded like there were 2 issues. One of them were raw material shortages and maybe the other was the very strong demand for the holidays.
I'm not sure that you can do anything necessarily to help the first problem, but how do you address the second problem or even the first problem? Is there enough variety out there for you to be able to buy -- find other products to sell to your customers and say, listen this is just as good, people will want this?
Or do you have to live with those issues?
Steven Spinner
Well, let me go back to the first part of your question. There is a third component as well, and that is that when we have a higher degree of out of stocks, we also lose out not only in the gross margin from the lost sales but from the reduced trade spend.
Because obviously when suppliers have significant out of stocks, then they're not going to promote the product. So we lose across a couple of channels.
As it relates to the out of stocks themselves, I think that we had some pretty unusual ingredient shortages that were pretty prevalent. I think that a couple of things happen.
One, suppliers add more capacity and when demand increases for a sustained period of time, they add capacity similar to what we're doing with building new buildings. It just takes a little time.
The other interesting thing that happens in our industry is that a large percentage of our suppliers use co-packers to produce their product. They don't own their plants.
So as they reach capacity in one co-packer, they either have to get that co-packers to add capacity or they need to find another co-packer who is willing to make the product. And these things just take time, but we're pretty confident that the system is robust enough that they'll produce more product.
And I think that will happen and we've seen it happen already. So we have a fair degree of confidence that supplier out of stocks will mitigate.
Sean, I don't know. Do you have anything to add?
Sean Griffin
Well, also, it's just the current demand and capacity issues leading up to and through the holidays. So as we sort of peak the holidays and get into a different cycle, it gives the suppliers an opportunity to reevaluate capacity, take a breath, if you will, and get on track to the current demand.
Yes. We -- we're seeing that in our numbers.
Steven Spinner
Yes. And one category that's been all over the news is nut butters -- organic nut butters, peanut butter in particular.
And when you're out of stock on an item like that, it has 2 compounding effects. One, you're out of stock on the case and two, nut butters are very expensive.
So your dollar outs grow significantly when you have a category like that with an out.
Meredith Adler
Okay. That's fair.
I guess, my final question is maybe a little bit of a tougher question. And if Scott is looking at the glass half full, I'll look at the glass half empty.
You -- it seems to me that as an industry and as a company, you have 2 things going on that create a lot of unusual impact. The first is tremendous growth of the industry and the second is your effort to become a much more streamlined efficient business.
I guess, the question is, how long does that last? I mean, should we anticipate that this just kind of thing is going to happen for a while?
I'm not saying there's anything wrong with having these issues but I feel like people -- everybody wants to just sort of wipe it out. But if it's going to continue, they shouldn't, and I just happen to be in the camp that, you can't exclude the onetime cost for Safeway, you can when you compare year-over-year, but you can't when you think about the earnings power of the company so it's a little bit along the same line.
Steven Spinner
Well, I'm not sure exactly what the question is but I mean, I think at the end of the day our net earnings and EPS still grew over 15% during the quarter. So yes, we had some onetimers that were painful.
I would agree with that.
Sean Griffin
But I think Meredith, I mean, with what you're saying really from an operating standpoint -- the write-off. And if you look at this fiscal year, I mean we're not trying to pull out the impact on the gross margin as onetime.
We're explaining what elements are that were behind it and the only item that we're addressing is the impairment in the ending of that royalty agreement. So I mean, we can disagree, and we have in the past on the onboarding of a customer the size of Safeway.
But I think to Steve's point, I mean if you want to leave the information in on a GAAP basis, it was up 42%. If you want to pull it out, you can get somewhere between -- I don't know what the number would be if you pulled out the Safeway piece but you'd still be in double digits up.
So I mean, it's -- everyone comes up with a different perspective in that sense.
Steven Spinner
Yes. And Sean just made an interesting point, which is true.
And that is as a management team, we're extremely disciplined in the sense that we're building the company for a long-term. And so we're going to make decisions that we need to for the long-term and that means implementing systems like TMS, implementing systems like WM in our warehouses, increasing the CapEx to add capacity -- with 3 new buildings.
If we were more focused on near-term results, I'm not sure that we would be doing those things. But we have a high degree of confidence in the industry and the industry's growth and obviously our ability to deliver both top line growth, as well as bottom line margin expansion and bottom line earnings growth.
So we view this quarter and the things that happened in it as just part of the process.
Sean Griffin
I think also that in transformational initiatives such as are underway at UNFI, it's always a balance. This is obvious, but I think important to say it, that there's always a balance around how fast we move versus the risk.
So we believe that we're taking the appropriate balanced approach to both speed and risk mitigation.
Meredith Adler
I'm sorry. I didn't mean to be criticizing what you're doing because I applaud the long-term approach and you have to do it.
Your business is growing very quickly. I -- probably, the message was really for investors that the entire package of what you are includes needing to make investments in facilities, in technology and nothing ever goes perfectly smoothly and that's the nature of the business.
But I guess that was a little bit of getting on my soapbox, so I apologize.
Sean Griffin
Definitely all right.
Steven Spinner
And we, I mean, we try to be as transparent. I mean, we put, I mean, as much as it caused some pressure on the stock when we gave our fourth quarter earnings.
We don't break out when we open up new facilities as nonrecurring. We put the cost associated with Denver -- the new Denver facility into the cost of relocating from one facility or other into our GAAP guidance.
We provide the information so that those investors who want to exclude it, have the opportunity to do so but from our standpoint it's in the numbers. So you're right.
I mean not everything goes perfectly, and that's why there's a range for the guidance. But from our standpoint, we try to include as much of that in our guidance that we give to the street and give them the opportunity to pull it out if they so desire.
Operator
And our next question comes from the line of Karen Short from BMO Capital Markets.
Karen Short
Actually just on that note, in terms of guidance. I assume you're maintaining your prior fiscal '13 guidance that even though there's been a lot of noise.
I just wanted to clarify that.
Steven Spinner
Yes. So we did not make any changes to the guidance.
So what we gave at the end of the fourth quarter setting for fiscal 2013 is still in effect.
Karen Short
Okay. And I guess in turning to sales.
Wondering if you could make any comments on sales trends at a cadence of sales into or during the first quarter and then kind of sales trends into the second quarter?
Steven Spinner
The sales trends have been pretty consistent across both quarters. As I mentioned in my prepared commentary, we do lap the Safeway business.
We just lapped the Safeway business. So you'll see some moderation of probably 3% to 4% in our overall top line through the rest of the year but the net sales growth is -- continues to be strong.
Karen Short
Okay. And then on the strike, or negotiations.
Is that something that we should expect ongoing costs into the second quarter from them?
Steven Spinner
Karen, it's hard to know. If we need to, we will.
We are hoping that we can get it settled as fast as we possibly can.
Karen Short
Okay. And then on the...
Steven Spinner
Karen -- Karen, just to add to that. But as we sit here today, I mean, we continue to incur cost into November because we haven't yet reached a resolution.
Sean Griffin
And we continue to be prepared to do that in an effort to make sure that our customers get service.
Karen Short
Okay. And then just turning to the supplier out of stocks issue.
I guess, I mean I understand what you're saying. And -- but in general, it would seem that the out of stocks or the supply issue would have maybe impacted like the little guy, like the independent a little more than supernatural or the supermarkets.
But the organic growth rate at the independents was still really strong this quarter. So I don't know if there's any color you could provide there.
Steven Spinner
Well, out of stocks for us affects everybody equally because we don't treat any customers differently as it relates to the supplier out of stocks. So the supplier out of stock rate you would apply equally across all 3 or 4 of our channels.
Sean Griffin
But I think to the question, Karen. Or to little more -- to add on to what you're asking, I mean, I think it reflects the strength of the industry right now is that all the channels put up strong numbers and had we had that additional inventory, and been in a position to sell it through, our growth rate while strong for the quarter, may have been even higher.
Unknown Executive
That's a good point. Yes.
Karen Short
Okay. And so you would say that supply issues are what, 80% resolved at this point, 60%?
Sean Griffin
That's hard to know. Do you have any feel?
Steven Spinner
I would just say the indications are that it's improving and has been improving, but I don't feel comfortable with any -- putting any kind of relative value to that.
Karen Short
Okay. So -- and then the last question is just any update on the rollout of systems to other facilities?
Do you know for, I guess, the first thing is that you still feeling pretty comfortable that you'll be able to do 2 more facilities this fiscal year? And any idea which facilities you're planning on doing?
Steven Spinner
Well, we continue to feel good about Ridgefield, and I commented that Lancaster as well is performing to expectations. And we continue to benchmark performance both of these distribution centers against overall performance.
So we are not there yet, where we can describe where we go next, and we certainly will communicate that when we have that nailed down.
Unknown Executive
Yes, we just don't yet have a firm answer on when and where the next DCs are going to be. So I would say that it's unlikely that we're going to do 2 this fiscal year, likely that we'll do 1.
Operator
And our next question comes from line of Sean Naughton from Piper Jaffray.
Sean Naughton
Mark, maybe you can talk a little bit about the inflation fronts, maybe what you're expecting for the next kind of 3 to 6 months? We did see a little bit of moderation here in the quarter.
And then as it relates to that, what you're kind of seeing in terms of your fuel prices. Do you continue to expect to get that sort of benefit spread to the overall national average?
Mark Shamber
Yes. So with respect to inflation, I would say that we still feel pretty comfortable with the guidance or the range that we have given at the start of the year, at the end of the fourth quarter, which is probably somewhere between 2 and 2.5, at least through the second quarter.
I might say through part of third quarter at this point, just based on where it's coming out on a monthly basis. So we've seen some price increases going through, but those price increases were more in the range of 2% to 3% for certain customers or certain suppliers, I should say.
And all that would do is sort of maintain the current rate of inflation that we have. So I think that as we sit here today, for the next 3 to 6 months, we're probably still in that 2% to 2.5% range.
But as we continue to have shortages, there could be an impact where the suppliers are fighting over the supply that's out there and that could lead to increases as well at some point. Hasn't happened yet, but it could.
And then, sorry, second part of the question again, Sean?
Sean Naughton
It was just on the fuel, what you were expecting on that front moving forward.
Mark Shamber
Yes. I mean -- so as a company, we continue -- Sean's team continues to evaluate where fuel prices are and when it's opportunistic for us so we're comfortable with where it is versus our plans, we will lock into sort of fixed-price contracts that give us some protection.
We have been successful in mitigating some of the rising prices by virtue of the efforts that we undertake regularly to look at the routes that we have and reduce the miles that we're traveling. And so I think that we'll still see pressure on fuel prices, particularly this time of year.
We'll probably see diesel prices go up through February or March. But we've got a portion of ours locked in, and that sort of mitigates where the overall national average comes in versus our own performance.
I would expect that -- single-digit movement as long as diesel prices don't move double digits or more.
Sean Naughton
Got it. And then, I guess, just on the gross margin line.
Obviously, a number of things impacting that in the quarter. But as we look out, and I think Steve you had mentioned that the -- at the anniversary of Safeway, the growth may come down a little bit.
Is there any change -- possibility that the change in the growth and the mix from where you're getting your sales and your channels and distribution could actually start to be a little bit less of a drag as we move through the balance of the year on the gross margin line?
Mark Shamber
I think in our own internal forecast thought process, once we lapped that business, our belief was that there would be some moderation. Now one thing that's working, both with us and against us, is our continued strength in the supernatural channel, which is just phenomenal growth, which adds a little bit of an additional wrinkle.
But I think that our view was that once we got a year past the Safeway business that what you described would happen.
Operator
And our next question comes from the line of Andrew Wolf from BB&T Capital.
Andrew Wolf
On the sales side, it was kind of pro forma for the lost sales from the vendors not being in stock -- you can take out Safeway -- so you look at kind of core business, but you add in what could have been sold if it was in stock, it looked to me like the case growth actually would have accelerated sequentially, pretty stunning. But -- and assume that's the case, and I guess you would have to analyze your orders more than your shipping to figure that out -- could you comment on what -- if there's anything going on either with the categories, sounds like you -- or maybe elaborate more on where you're seeing accelerating growth in any of the channels or segments that you comment on.
Steven Spinner
Are you talking, Andy, about specific product categories that are seeing high-growth?
Andrew Wolf
If I'm right that it's accelerated or accelerated in the period, the case growth looked like it accelerated on a pro forma basis.
Steven Spinner
Yes. I mean.
It's...
Andrew Wolf
Where would that be going? On either by category or by customer grouping or any other way you want to describe it?
Sean Griffin
Yes. I mean, it's the same categories that kind of we talk about every quarter just continue to show remarkable growth.
And that's in organic produce in particular. They lead the way every single quarter in year-over-year growth, followed probably pretty closely by continued growth in organic dairy, core center store items like cereals and snacks, nuts.
Those are the primary drivers of just tremendous growth in the organic category. And we also see a lot of growth in the specialty side but that's more a factor of additional customer concentration more than it is year-over-year net category growth.
But I don't think that there's anything unusual about the categories that continue to show significant strength. On the channel side, one of the things that obviously makes us very happy is when the independents start growing pretty close to 10%, which is what they did.
And so we are incredibly optimistic that that's a good indicator for the industry.
Andrew Wolf
And I just want to follow up on supermarket channels specifically. Barrons wrote a piece about Hain's sort of being cautionary that you can get product on the shelf at Wal-Mart or supermarket but it may not move.
Do you see that movement and you've gotten -- with Safeway, it's not like you've gotten your product on the shelf, but you've just placed it with a distributor, but not -- just the whole channel, the whole supermarket channel. As you get the sales that you're getting out of that ex-Safeway, which I know it's a pretty positive number, even excluding the new Safeway business.
Is that more velocity? I mean are the items that you sell moving out of the supermarket channel?
Or is it just by adding more items which as Barrons says may not move if -- you can get stuff on the shelf but it may not move.
Steven Spinner
Yes. I mean, I read that article, and was really disappointed by it.
I felt like a lot of the data they used was very old. Hain is a terrific supplier for us.
We've got an incredibly close relationship with them. What's good for us is good for them and vice versa, it's extremely mutually beneficial.
So either -- I didn't buy into that article one bit. As far as of the second part of the question, I think that it's both the -- certainly the conventional supermarkets continues to add SKUs but when we look at what they're adding versus what our volumes are doing, I mean it is moving off the shelves.
I mean having said that, we've talked in the past that anywhere from 7% to 10% of what we sell was introduced in a given year. And as a result, there are some products that don't move and some that do.
And so there may be an aspect of brands are introduced, and they don't have success whether it's at the independent supernatural or the conventional supermarket. But there are just as many that come on the scene and take off that have phenomenal growth.
Sean Griffin
And I would answer it little bit differently, Andy, in that I think that Hain's job and UNFI's job is very aligned in the sense that, for us, we view our responsibility is to get organic out into as many possible consumers' hands as we can. And that means if we've got to do it by reaching out to all -- to the independent channel, we do it; the supermarket channel, we do it; the supernatural channel, we do it; the mass channel, we do it.
I think that it benefits the industry in the sense that the more successful we can be in getting penetration of Hain's products or anybody else's products out to as many retailers as possible, it's going to benefit the overall industry at the end of the day. Because if somebody starts in a -- starts buying 1 or 2 organic items in a retailer -- a mass retailer, history proves that over the course of time, they are going to become what we call a crossover shopper.
That mass retailer's not going to be able to satisfy that consumer's demand. That consumer's going to then need to go to either a conventional retailer with a broad offering or to Whole Foods or to an independent and that benefits us.
Andrew Wolf
Okay. Got you.
So that sounds like there is some velocity movement all over the place, just -- not just and in particular with supermarkets where conventional items, not -- Campbell Soup, not to pick on Campbell, but that stuff isn't -- the velocity has been the wrong way. Okay.
And the only other thing I wanted to ask on the -- you called out I think $4.2 million of gross profit dollars that would have come if vendors had been in stock. And obviously, you're using the kind of lower depressed rate on gross profit margin from this quarter, won't quibble over that.
What I really want to get to is -- now, that's not all pure contribution dollars because that still would have had to have been moved in the warehouse, there would've been some certainly item movement cost, you would have leveraged delivery.
Steven Spinner
Right.
Andrew Wolf
So from my calculation, it looks like it's about $0.02 to $0.03 of forgone earnings. Is that in the ballpark?
Steven Spinner
That's probably in the range. Yes.
Operator
And our next question comes from the line of Stephen Grambling from Goldman Sachs.
Stephen Grambling
So there's a lot of discussion on the strength of natural organic. And I know that specialty has been something that's discussed as an opportunity.
Can you maybe help us frame that in terms of the size, what channels that, that can kind of open up and then also maybe a margin opportunity going forward?
Steven Spinner
Sure. UNFI got into the specialty business in 2007 with its acquisition of Millbrook Distribution.
Today, we've got a pretty small share of the overall specialty foods market. Obviously we have a much greater share of the organic market but the specialty market itself is a -- directionally, this is accurate, it's not exact, it's probably a $40 billion industry.
So when you -- if you look out a couple of years, the greatest opportunity we have in terms of selling additional categories of product is in the -- is in the specialty space. The reason that our conventional channel, supermarket channel is increasing at 25% a quarter is because we are selling more and more conventional product to customers where historically, we either only sold the natural organic or we couldn't sell them at all because we didn't have natural organic and specialty.
So there's just a tremendous amount of room for UNFI to grow organically and specialty, as well as through M&A and specialty.
Stephen Grambling
And so maybe a quick follow-up on that in terms of the M&A aspect. I mean, are there opportunities that you're seeing that are coming up with that or actually increasing or increasing opportunities as a result of the current environment?
Or has that been a more steady state and it's still just very fragmented?
Steven Spinner
Yes. It's been steady state.
We didn't -- interestingly, we didn't really see any pickup in the deal flow related to the end of the year, which was surprising. We did -- we made 2 acquisitions that we've talked about in Canada.
They were primarily specialty foods companies and there's lots of opportunities for us here in the U.S. But we look at them as they come up.
We're not in the market for fixer-uppers. We've got a pretty disciplined approach to the way we approach M&A.
Stephen Grambling
Great. And then one more kind of granular question maybe for Mark.
As we think about CapEx in the back half ramping up, should we be expecting SG&A, at the same time at least on a year-over-year basis, to ramp up the core rate, to be higher despite all the kind of onetime items and noise?
Mark Shamber
Steven, it's really a function of our standpoint is to where the volume comes from. Because our operating expense is to serve our customers are in operating -- like -- so the Ops expense to deliver warehouse, et cetera, all -- is in our SG&A line.
So, I mean, if we see a substantial pickup, we'll see some increase in the dollars even though the percentage may still get leveraged. So if you're talking from a dollar standpoint, certainly we'll see some growth there, but from a percentage standpoint, it's where that growth comes where -- we've talked in the past that the supernaturals and the supermarkets have lower operating expenses where the independents have higher.
So it's not an easy question to answer without knowing the mix in those quarters.
Operator
And our last question comes from the line of Ann Gurkin from Davenport.
Ann Gurkin
Wanted to follow up a little bit more on the M&A. Are there opportunities, particularly in Canada, for M&A opportunities over the next couple of years?
Steven Spinner
Yes. Absolutely.
We have done quite a few follow-on acquisitions in Canada. As you know, we've talked about those over the last couple of quarters.
I think we've done -- since we made the initial acquisition in Canada in 2010, I think we've done -- how many have we done in Canada, 2 or 3?
Mark Shamber
Two in Canada.
Steven Spinner
Two in Canada since then. We've got a nice pipeline there.
We love being in Canada. So we are tremendously optimistic.
And again we continue to look at opportunities in the United States as well both in terms of specialty foods companies, niche players in the organic segment, perishable companies. We just acquired a company through our Albert's division that we closed on in the last quarter that will be extremely important to us in the sense of sourcing organic product.
So I think there's lots of opportunities. We just -- we've got a very disciplined approach to, which ones are the right ones, and which ones are the wrong ones.
Ann Gurkin
Great. And then, Steve, if I could just ask you in the food space this week, we have the consolidation or the pending acquisition of Ralston by ConAgra and their interest in private label.
So I'd be curious, your opinion on private label. Are you working with customers to work towards more private label organic or how do you see that maybe unfolding in the organic segment and UNFI?
If you don't mind commenting on that.
Steven Spinner
Yes. So first, UNFI has several -- what a lot of people would call private label brands.
First one is a brand called Field Day, which we rolled out about 2 years ago. It's now a $12 million organic brand.
Very proud of the fact that, that brand is a non-GMO brand predominantly, which is one of the only brands out there that is. We also have a brand called Woodstock Farms, which is private to UNFI and that's a $50 million brand for us.
As we look out into the retailers, the organic, the big retailers in the conventional supernatural space have had private label organic brands for some time. I would say that we haven't seen any significant increase in the number of SKUs rolling out in private label, but they are extremely popular, and there's certainly a lot of volume that flows through those brands.
We carry them a lot in our warehouse. It's been a -- I don't think that we're seeing a migration towards significantly increased number of items flowing out under the customer private labels.
Operator
And that does conclude our question-and-answer session. I'd like to turn it back to management for any closing remarks.
Steven Spinner
All right. Thanks again, everybody, for joining us this morning.
We had a lot going on, and I hope the call helped answer a lot of your questions. Have a terrific holiday season, and we look forward to catching up with you again at the end of our second quarter.
Operator
Ladies and gentlemen, that does conclude the United Natural Foods fiscal 2013 first quarter results conference call. If you would like to listen to a replay of today's conference, please dial 1 (800) 406-7325 with the access code of 4575783.
We would like to thank you for your participation. You may now disconnect.