United Natural Foods Inc (UNFI) 2003 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the United Natural Foods first quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference please press star, then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference Ms. Vanessa Schwartz, you may begin your conference.

Thank you. Good morning, everyone, and welcome it the first fiscal quarter call for United Natural Foods. You should have all received a copy of the press release this morning. If not, please call Thomas Walsh at 212-445-8495. And we will sent one out to you. With us today from management are Mr. Tom Simone, chairman, Mr. Michael Funk, Chief Executive Officer, Mr. Steve Townsend, President. Mr. Todd Weintraub, Chief Financial Officer. We will begin with some opening comments, and then open the call up for Q & A, as a reminder, this is being webcast today, and can be accessed at both www.unfi.com, and www.viavid.com. I'd like to remind everyone of the Safe Harbor statements and the cautionary statements that apply to this call today. Michael?

Thank you, Vanessa, and welcome, everyone, to our for example conference call, our for example resulted in earns of 28 cents per share, excluding special charges at the upper end of our previous guidance. We one against recorded a record sales quarter revenue of $311 million. This was an increase of 10.9% over last year's first quarter. Our sales by channel resulted in increases of 21% for our mass market (ph) supermarket accounts, 12% for our independents, and 6% growth for our super-naturals. This was impacted by the transition of the Wild Oats business, which began to be switched to a new supplier in August . If we exclude those sales, our growth rate would be 16.5% for the quarter. Also impacting sales this quarter was the Blooming Prairie acquisition, which closed on October 11, and added approximately 20 days of sales to our quarter. We were very pleased with the strength of our mass and independent channels during a quarter when many companies reported soft retail sales. Our current mix of business by channel is independents with 41%. Super naturals with 37%, mass market with 15%, and miscellaneous channels with 7%. Our largest customer, Whole Foods Market, was 22.8% of our total sales, while Wild Oats dropped to 6.1% of our total sales for the quarter. We have previously announced the signing of a purchase and sale contract to purchase northeast cooperative warehouse in Vermont. We anticipate closing with northeast by the end of this December. The acquisition will bring approximately $120 million annually in new sales to our Eastern Region. We will continue to operate the northeast facility until our Chester field, New Hampshire expansion is complete next summer. Because the northeast facility is only seven miles away from our warehouse, we anticipate retaining a significant percentage of the employee base, which should make the consolidation much easier. We will not be purchase you the northeast facility. As stated previously, we anticipate the acquisition of northeast to be neutral to earnings for our current fiscal year. Our top-line forecast for the remainder of our fiscal year is 9 to 12% growth and this does not include sales of the merger of northeast cooperative warehouse. Our acquisition of Blooming Prairie warehouse closed on October 11th, 2002. We have assigned management from the Western Region to assist the Blooming Prairie staff in implementing synergies and improving operational efficiencies. Our primary priorities is to integrate UNFI buying power and lower transportation and warehouse costs. We believe we can achieve 200 base points of improvement in the operating margin over the next several quarters by focusing on these and other initiatives. We continue to believe this acquisition will be neutral to slightly accretive this fiscal year and accretive thereafter. Our earnings guidance continuing to be $1.18 to $1.20 this fiscal year. We were especially pleased of our performance in light of our challenges of eliminating the Wild Oats bills. The Western Region was especially challenged and performed an incredible job in adjusting our transportation and warehouse systems in eliminating expenses associated with servicing this customer. We are also pleased with the progress we're making in replacing the sales, as the sales departments have gained new business at a rate higher than we previously forecast. At our annual shareholders meeting held yesterday, we announced a plan strategy, which will promote Steven Townsend to Chief Executive Officer effective January 1st, 2003. He has been with the company over 20 years and has held the positions of CFO, and most recently President of UNFI. I have tremendous confidence in Steve that he will continue to make progress in growing the earnings and integrating our new acquisitions. I am honored to accept my new position as chairman of the board on January 1st as well. I plan to be active in the company's strategic direction, investor relations, and assisting Steve in key customer and vendor relations. I'm very pleased that our current chair Tom Simone has accepted the position of vice-chairman. He will continue board administrative functions and corporate governance, so our management team remains intact in building the natural products premier distributor of natural and organic products. I would now like to turn the call over to our Chief Financial Officer, Todd Weintraub.

Thank you, Michael, and good morning. We had or 9th consecutive number with sales of $311 million, which was an increase of 10.9% over last year's for example. This includes sales of our Blooming Prairie division, acquired on October 11, and sales for produce perishables distributor acquired in November of 2001. Excluding revenue from these sources, sales increased 16.5%. Our Wild Oats business grew 16.5% year over year. We had 21% growth -- 12% in our independent channel, and 6% growth in super naturals. Excluding acquisitions and Wild Oats, those growth rates were 34% for the super naturals, 20% for the mass market, and 9% for the independents. Special items for the quarter were $1.4 million in expenses after tax, or 7 cents EPS. Special non-cash expense was related to swap agreements, and we also incurred special charges in the transition of Wild Oats. Due to changes in the yield curves, our fair value decreased approximately $1.7 million. Special items of approximately $500,000, or $300,000 after tax were for severance related to Wild Oats . We will continue to recognize the swap agreement, whether we recognize income or expense in any given quarter and the magnitude of that item is dependent on yield curves and the remaining terms of the contracts. Please note on the expiration of the swap agreement -- gross margin was 19.6% in line with our guidance in the high 19s. We expect gross margin to increase to the high 19s or low 20s, now that our business with Wild Oats, a low gross margin customer, has declined due to the expiration of our primary supply contract. Operating expenses, excluding special charges were 16.2% of sales for the quarter. Operating expenses were negatively impacted by non-special item inefficiencies related to the decrease of the Wild Oats business. We do not expect these inefficiencies to continue after the for example. We expect expenses will remain in the low 16s due to the change in our distribution channel mix, resulting from the decrease in the Wild Oats business, as well as an initially higher expense structure at Blooming Prairie. Our operating income this quarter was negatively impacted by a Hershey import division. Hershey sales, gross margin and expenses were all unfavorable, resulting in a loss of approximately 1 cent EPS. We are taking, to increase sales and margins, but anticipate Hershey may continue to incur operating loss during our quarter. Turning to working capital, our day sales outstanding for the quarter was 28.6 days, compared to 28.5 days last quarter . Days in inventory was 51.9 days, compared to 50.3 last quarter . Our borrowing base at October 31st, based on accounts receivable and inventory levels, was approximately $144 million, with remaining availability of approximately $19 million. We expect to put in place 30 million in additional financing secured by real estate during our second quarter. Cap Ex was $4.3 million. We expect cap ex for fiscal 2003 to be 20 to 22 million, with the expansion of our Chester field facility, the major project. Turning to the remainder of fiscal 2003, we are maintaining guidance of $1.18 to $1.20 for special items. We are maintaining guidance at 26 to 28 cents, and expect the second half of the year to be stronger with EPS of 30 to 33 cents per quarter. We expect top-line growth to be in the top range for the remainder of the year. This excludes any impact of the northeast co-op acquisition. At this time I'd like to turn it over to Tom Simone, our chair, for final comments.

Thank you, Todd. At this time I'd like to thank Michael Funk for his leadership as CEO. The board of directors joins me congratulating Michael, Steven, and all our team for a great operating fiscal year, and now I'd like to open the lines to questions.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the 1 key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. If you are using a speakerphone, please lift the handset before asking your question. One moment, please, for the first question. The first question comes from Scott Van Winkle of Addams Harkness. Please proceed.

Thanks. Congratulations, guys.

Thank you.

A couple questions about the acquisitions. Particularly the northeast co-ops, that business is breakeven today. At what point or how long will it take you to get to a level where it's first initially neutral to earnings, and do we have to wait until after you convert the facility into your own facility before you really begin to see margins go, and therefore accretion.

I think as the year goes on, of course, assuming we close this the end of December, early January, we will have some abilities to impact margin in a positive way, by just investing capital and getting the inventories, you know, because to full stock by buying on forward buy, getting some early paid discounts and that kind of thing. So we will be able to impact margins on a positive way, we think fairly quickly. But the real pickup in margin there will happen when we consolidate the business, and we're estimating probably, you know, early summer next year. So at that point, basically, our end of fiscal year is when we can achieve the big synergies.

Is there any difference in the contracts or the business of that company that would preclude you from not generating, say, a 4% operating margin like I think you're doing in the East now?

No. Once we consolidate the business there's no reason we can't achieve that.

And natural (ph) whole foods a customer of northeast?

A very small amount of business. I think whole foods and Wild Oats were less than 3% of sales in northeast.

And one question on inventories. Should we expect further improvement in inventories? They were a little higher than I thought, because I thought you had a nice improvement from the Wild Oats business. Was there still natural (ph) whole foods at the end of the quarter in that number?

There was a small amount. Scott, I think you had a number that was higher than what Todd just reported. We were reporting 51.9 days of inventory this quarter, compared to 50.3 last year. I think you had a higher number in your note, so you might want to double-check that. Bottom line is, yeah, there's probably a small amount of inventory at the end of the quarter. Plus I would you think there's some Blooming Prairie impact at the end of the quarter as well.

Great. Thank you. Thank you. The next question comes from Gary Giblin of C.L. King.

Good morning. How do you plan to approach the warehouse consolidation with northeast to avoid, you know, the substantial problems encountered with moving still mills volume at the Chester field, which was actually steel mills was a little stronger operation. So, you know, have there been learnings (ph) to help you solve those problems that you incurred?

Absolutely. The issues that impacted our Eastern Region integration in 1999 were primarily a computer conversion. There's not going to be a computer conversion involved with the consolidation of the northeast business. We're simply transferring the sales, you know, seven miles away into our newly expanded facility, and the additional bonus is we have the employee base we will be able to retain as the employees are in that same market. So we don't anticipate any major problems. We think this will be a smooth transition. We've now done many transitions like this since those days in '99, and we've gained a lot of experience, as evidenced with the Fontana move that we transferred a third of the business out of our northern California facility down there, and the Atlanta facility that we moved also last year. In both those cases, we had minimal impact on our customers, so we're very confident of not impacting our customers with this northeast move.

I mean, at Hershey, have you had customer issues? Or is that just cost overruns? Moving things around?

Well, at Hershey, there's a variety of issues impacting us. They did relocate into a new facility. They've got a higher expense base now that we anticipated growing, the sales base at a higher rate. So sales are coming in until forecast, and expenses are still running higher than projected, and we are also, you know, trying to build the gross margin there. So we've got work to do there. As Todd reported, we anticipate potential losses carrying into this Q2, but we are very focused as a company to put as many resources as we can to straightening that situation out.

Okay. And with your independent store customers, is there any retail level, same-store sales decelerating happening there? The reason I ask is Wild Oats indicated they had some deceleration after starting in late September, and usually the independents run several comp points below whole foods or Wild Oats. So what can you tell us about that?

We don't actually track comp sales for our independent accounts. All's we really track is the growth rates by the channel, and you know, the fact that we had a 12% growth for the independent, you know, channel this past quarter was, you know, above our expectations. We had reported I think a 6% growth the previous quarter. So the strengthening in independents was a pleasant surprise. We just don't see the lower trends that some of the other retails have reported.

Okay. That's great. Last question is, where would you estimate your annualized secondary volume from Oats to be and if we could measure it from post-October, because, you know, in September and October there was transition going on there, with their other distribution arrangement. But from like November or December of this year to one year out, 52 weeks out from there, how much wholesale volume do you think you'll have?

Yeah. I think the annual run rate with that business will be somewhere between probably 12 and 20 million.

Very good. Thanks very much.

You're welcome The next question comes from Greg Badishkanian of Salomon Smith Barney.

Just a follow-up question on the independent. I think if you exclude acquisitions, you mention that independents grew 9%, so you saw an acceleration in your internally generated revenue growth from that particular channel. You know, is it just that the industries picking up, or are you gaining share from Tree of Life or some of your other competitors?

I think it's both. I think we are seeing still solid growth in the independent channel. There are many parts of the country where there are, you know, new independents still opening stores or expanding their businesses, so that's fueling internal comp growth. We are, I think, you know, picking up market share from other competitors at potentially an even faster rate than we were. And some of this is what we thought may occur with the Wild Oats transition. So I think you're right on both counts.

With respect to the mass business, there was actually a pickup of a little bit there as well. I think it was 19% last quarter, and it was, I think you said 20%.

21.

-- excluding all the acquisitions. So that's a pretty high growth rate. Again, are you picking up a share, or are regional customers just growing faster than the overall market.

I think in the mass channel, we're probably seeing more internal growth or comp growth with existing customers than we're seeing maybe market share gains, particularly in this quarter, the last couple quarters. So we're just real happy with the existing mix of business that we have in that channel and their ability to grow the business with our sales and merchandising teams working with them.

Great. Thanks, and good results.

Thanks, Greg. Thank you. The next question comes from Carroll Buyers of RBC Capital Market.

Hi, good morning, everyone, and congratulations as well. I was wondering if you could comment on the gross profit margin, why it was affected negatively, and what kind of terms were you extending?

Carroll, your question on terms is relevant to what period?

This quarter.

Well, Oats had terms of basically 30 days for -- throughout their, you know, their contract.

Right.

But bottom line is the gross margin issue, you know, we have expected the gross to start going up, as Todd mentioned, the high 19s, low 20s, but I think, you know, we had Oats probably for a longer period in the quarter than we had previously thought. As you know, when we put those forecasts out, we weren't really sure of the exact timing of the Oats business. So I think we were happy with the gross margin overall, but we will see it strengthening.

Carol, this is Todd, we also were negatively impacted by Hershey. They came in quite a big below where we had them budgeted for. Even though it is a small part of the business, that did negatively impact it.

So it's similar to the issues you saw last quarter with Hershey, inefficiencies, as far as transportation?

Hershey's' issues, like I said are -- their expenses are probably more related to the productivity in the new facility lower sales than anticipated, and weakness in the gross margin.

Great. Then if you look at the rest of the year, looking at the direction of the operating margin, can you talk about the next three quarters, and just where you see operating margins kind of going, and from what base next quarter? Then, finally, when do you anticipate to get to that 4% goal?

Okay. Well, we had basically forecast the operating margins to be dragged down slightly by Blooming Prairie, and with the impending merger with northeast. So, you know, probably for the remainder part of the fiscal year, we'll see operating margins in the 3.4 to.37 range.

Okay.

We do feel at the beginning of our next fiscal year, with the, you know, northeast business consolidated into New Hampshire, and given ourselves, you know, about three-quarters of synergies at Blooming Prairie I think the 4% operating margin target is going to happen fairly early in our next fiscal year.

Then one quick question. I didn't get the growth rate of the super-naturals.

That would have been 34%, Carol.

Great. Well, thanks, guys.

That's excluding the acquisitions and excluding Wild Oats is the 34%.

Is that what you needed?

Yes, that's the number.

And I lied. I had one more question. Can you break out the revenue between Blooming Prairie and boulder fruit.

We're not breaking out those divisional numbers.

So it's just a total?

Yeah.

Thanks, again.

Thank you. The next question comes from Andrew Wolfe of BB&T.

Nice quarter. What was in the other income that you reported?

The other income, there's the change in the fair value, and then, you know, we have some other net of a couple hundred thousand. I can get back to you post-call with details on that if you'd like.

Okay.

There's no one major item in there to account for most of it, but we can talk off-line. That's in detail if you want to.

So just a bunch of small thing. Can you detail the special charges you kind of anticipate, give us a feel for it the rest of the year, particularly with New Hampshire happening later on.

Yeah. We don't anticipating any special charges related to Oats. Those should all be out of the way. I think the only special charges you'll see from here on out are the interest rate swap, you know income or expense, whichever way that goes, in the Chesterfield facility, which, um, we really didn't have, you know, anything special, but we'll be starting to ramp that up, you know, over the next couple quarters, and we will have some special charges relating to that.

Okay. Will that sort of look like southern California? Similar thing, you're moving inventory and costs, things like that?

Same type of thing.

Lastly, on systems conversion at Blooming Prairie, could you tell us a little bit about the time line and sort of the approach you'll take to that?

Yeah. Blooming Prairie is continuing to operate on their own operating system. They have integrated operating system that they're working on right now, and we don't have any plans right now to, you know, to bring them on to anybody else's system. We'll continue to evaluate that, you know, as we move forward, but right now there's no plans to do any kind of system conversion.

What is your opinion of their current system, its suitability?

Actually, we are pretty pleased with the status of their current IT system and staff, so there's not a great, you know, motivating factor to, you know, motivate -- or move their systems. We are also, you know, of the belief these days -- many times you can continue toe operate an operating system as long as it can talk to a central data bank where you can gather centralized information. The incentive to move people off an operating system is not as we don't believe, as great as it once was. There won't by any system conversion there anytime soon.

Like Carol, I guess I lied, I have another last question. Hershey, what was the for example and the year-ago earnings. What was the swing from, you know last year for example, and if you could tell you what the made?

I don't have specific numbers from last year in front of me, other than to say last year they were not in a loss position. They were profitable. I would be surprised offhand if it was anything more than a penny. I'm pretty sure it was a penny, but they were profitable.

Thanks. Last thing, on Hershey, to fix it by the third quarter, to break even is it a sales-only issue? Or are there things you can do in gross margin, or even in expenses to get to bring down the costs?

I think it's really we've got to attack it on all fronts. Sales fix a lot of things, no doubt about it, and certainly there's a lot of focus on that. But there are other things related to expenses and productivity, and, you know, initiatives to get the gross margin up that we're attacking. So we're attacking that one on all fronts.

Thank you. The next question comes from Scott Van Winkle of Addams Harkness.

The transition of the oats business you thought you might have picked up some independent business. I was wondering, are you having customers call you, or is it just more of an active effort on your part?

Well, I think it's probably a little of both. Certainly our sails departments are very motivated in looking for new business opportunities and, you know, I think there's also -- customers continue to seek us out as they hear about our superior service. So it's a little bit of both.

And the staff that super naturals grew 34% excluding Oats and acquisitions, I would soup that Whole Foods is the vast majority of that. Are you growing that business at a much faster rate than they are growing themselves?

Yes. Basically, the bottom line is we've been able to get a higher percentage of Whole Foods business than we have in the past. We've picked up some parts of the country that we had previously not serviced. We're doing more business with their Texas stores, for example, and things of that nature. We are growing their business in general a little higher than they're reporting their overall growth.

Did you see any impact from the national organic standards going in place?

I don't think we can measure any immediate impact. I think the exposure in the press that that issue got will help us continue to build organic sales going down the road, but it's nothing that we can certainly measure short term.

Great. You said you're not buying the northeast co-op's facility?

Correct.

Thank you.

Operator. Next question is from Arnold Bree (ph) of Goldsmith and Harris.

It seems to me as the industry grows from a niche kind of business to something that is pretty big, is going to attract further interest from the supermarkets increasing shelf space and from food manufacturers introducing new product into the business, and I think that would be tremendously beneficial to you over the next one or two or three years as that process gets -- continues and accelerates. Conversely, as they reach critical mass in the business, it seems to me they're more likely going to back up and eventually do their own distribution, which could create volatility in your business somewhere down the road. Could you comment on that whole supposition?

We still believe, even with the high growth rates that the natural industries experiencing that relative to the rest of the conventional growth industry, we are just a fraction of the overall sales, and when you compare the actual inventory turns of our products with the conventional products, in most cases there's just the economics don't work for self-distribution by the chains, in the same way it doesn't work for the super value and Flemings (ph) of the world to carry our products. Literally, or fastest-selling products placed in those warehouses would be slowest selling products. As time goes on, there certainly will be a few items that reach that critical mass and potentially go into self-distribution. Where we've seen that occur in almost all cases, we've seen a higher percentage of growth rates with those particular accounts, even though they're taking in a couple items into self-distribution because of the interest in the whole category. Remember, we carry 30,000 products cross the country. There's no way that, um, the conventional channel is going to be able to focus on a large number of SKUs. I think they're always going to be looking for a partner to help them merchandise these sections.

Thank you.

The next question comes from Kevin Sonnet of Founders Asset Management.

Thanks, I've got three questions, I'll try not to lie about it. The first is do you have a sense of your market share in each segment?

No, Kevin, we haven't really tracked it that way. I think we're -- you know, what we look at is if you define the our market as the products that we sell that go through distribution, we're generally in the 20 to 30 percent market share in most of the grocery business that we're in, but I don't really have it by channel.

Okay. And then, just also asking about that super-natural number, with the acquisitions and exclude Wild Oats, I know you don't report a comp number by segment or even a total, but if you kind of look at the new business that you won in the quarter, new stores that you picked up in the quarter, approximately what kind of revenue number is that? In the super-natural segment.

Boy, in the super-natural segment, how many actual dollars were new business? I don't have that. Todd, do you have an estimate on that?

Not offhand. You know, again, the 34% that we quoted, that does exclude acquisitions and does exclude the Wild Oats business, and, you know, somebody made the observation before, that's mostly whole foods, but there are smaller super-naturals in there as well. So is your question how much of that is new doors, as opposed to same stores? Is that the question?

Yes.

We don't have that informs, and, you know, I'm not sure that we can even really provide it to you off-line. We just don't track it that way.

I just ask, because it seems like a new chunk of new doors, even if that business to your existing customers was comping (ph) it, even 15 to 20 percent, which is much higher, may you have a hundred million in the quarter, you know, so kind of 15, 20 million on top of that from a comp, and maybe 20 million in new business would be annualized new business of 60, 70, 80 million a new year, that might position us in thinking about higher growth as we realize the sales throughout the next few quarters, where we didn't have them in the prior year period.

I can't really comment on the specific math you're doing, but in general, yeah, the whole foods same stores, we comp along with that, and in addition to that, we are generally picking up the new doors they open are new doors to us, and we are seeing increased penetration within existing stores as well. So it's really a combination.

Okay. Great. Then, just lastly, with these two acquisitions, you know, one done but still some work to do, and one closing over -- you know sometime in the relatively near future here, what are your thoughts in terms of more acquisitions over the next 12 months? Do we kind of digest these for some period of time? Or are there opportunities that look pretty interesting out there today?

I think the focus for us is to digest these two deals. There's two fairly large acquisition opportunities for us and, you know, we have the Western Region working with the Blooming Prairie folks, and we're going to have the Eastern Region responsible for digesting the northeast consolidation. So I think over the next 12 months, we will -- you know, we'll have our hands full taking care of those two deals. However, we always want to be looking two strategic opportunities, and if there was something smaller that came along, we would certainly by looking at it, but I would have a hard time believing we would want to try to do a third deal in the next 12 months.

Okay. Great. Thank you.

Thank you. Again, ladies and gentlemen, if you have a question at this time please press the 1 key on your touch-tone telephone. One moment, please. The next question comes from Eric Larson of U.S. Bancorp Piper Jaffray.

Hi, everyone. Good quarter. I have one general question and one more specific question. Maybe you won't even want to field a question from Minneapolis, given that the timber wolves won.

Maybe you didn't see the game last night.

I didn't. Maybe I shouldn't have opened my mouth. The first question is we talked about the industry growth rate, it's not as much of an issue now but Michael, can you talk about the growth rate on a sequential basis, do you think the industries as vibrant as it was, or have you seen regional slowdowns or -- can you talk about the industry growth?

Yeah. We have been very concerned that as we've heard some of the reports -- not only in natural food companies, but in, you know just in general retail business, there's been some slowdown, you know, based on economic conditions. I think, you know, the pleasant surprise for us is we're seeing the growth continue not only in all regions, but in all channels. In fact, when we do take out the Wild Oats portion of our comparisons, we actually see it even strengthening more. So it's -- from our viewpoint, our vantage point, we're not seeing any slowdown at all. We're seeing continued strength.

Okay. My final question is more specific. I believe you mentioned in your prepared comments that you expect to get several hundred basis points of a margin improvement once the Blooming Prairie acquisitions is integrated, and I think it was like over the next two to three quarters if I recall the comments correctly. Does that get Blooming Prairie up to your margin? That seems like a big improvement.

What we said is we're looking for a 200-basis point improvement over the next several quarters, and the target is to get them to our 4% operating margin target for all divisions.

Thank you.

Thank you. The next question comes from Gary Giblin of C.L. King.

Following up on Eric's line of questioning, you say you're getting good growth in all channels, but the supermarkets clearly have sales problems in their general retail sales. So is it just that they're adding natural departments at a clip that gives you good growth, even though their total sales are pretty poor?

Yeah. I mean, that's the only thing we could conclude, is that the natural organic category is the one bright spot in the retail sales channel.

Okay. And are any chains reducing their natural? I know some people try it and then they find it doesn't sell well and they have a lot of shrink, and then think do away with it. Is that happening, but it's offset by chains that are adding on?

Yeah. I think the chains that are reducing their focus on the natural category are -- from where we see it, very few and far between. We think that the stores that are working with us are generally successful. You know, we try and customize the sets to the demographics in the area, and I think our market sales strategy has been very effective with the accounts we work with. I think some of the reports of mass-market customers that maybe are struggling with the category they're not people that are working with United Natural Foods.

That could very well be. And on the secondary business, to continue with Oats, is that -- have you now set the pricing and basic terms on that? Or is it under negotiation now?

No. We have a secondary agreement with Oats that outlines pricing and terms.

Okay. Thanks you, Mike.

You're welcome.

The next question comes from Greg Badishkanian from Salomon Smith Barney.

To follow up. With your acquiring Blooming Prairie, I believe it's been known as an aggressive pricer, and also with the apparent logistics issues with Tree of Life, have you noticed in changes in the pricing environment thus far?

Well, I think, again, those things are not felt short term, they're felt longer term. You know, Blooming Prairie' structure -- I don't think pricing-wise has been that different than UNFI's, and I would think just in general that there are -- our major competition that's out there, I think in most cases, is under pressure on their gross margin side. And so, you know, we would expect there will be -- there certainly won't be more pricing pressure going forward than there has been, you know, but, you know, these things tend to play out longer term and not have a short-term impacts.

Thank you.

Thank you. Gentlemen, at this time, I'm showing no further questions. I'd like to turn the program back to you for further comments.

Thank you. Over the past three years, I've been honored to have served as chairman of the board. The company has performed a comprehensive turnaround from our conditions three years ago, and some of that was mentioned in the questioning today. Both Michael and I are continually impressed by the strength and durability of our team, and as we change seats at the table, Steve, who has played a key role in our turnaround, moves to President, and CEO. Michael, our corporate soul, who put together a group of leaders becomes chair, and I become vice-chair. I want to express the board's and my personal admiration to the whole team. These men and women are the reason that UNFI is your proxy for the natural products industry. Thank you for your participation today, and have a great holiday season and a great rest of the week.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. Good day.