United Natural Foods Inc.
/ (UNFI-NASDAQ)/ Equity Research / UNFI | Page 1
Current Recommendation / OUTPERFORM
Prior Recommendation / Neutral
Date of Last Change / 02/24/2015
Current Price (02/23/15) / $82.20
Target Price / $99.00
SUMMARY
We are upgrading our recommendation on United Natural to Outperform from Neutral after it delivered robust first quarter fiscal 2015 results. Both earnings and sales exceeded the Zacks Consensus Estimate in the quarter on the back of continuous increase in demand for the company’s organic and natural food products and robust acquisitions. Earnings of $0.66 per share increased 17.9%, while sales grew 24.4% year over year. The acquisitions of Trudeau Foods and Tony’s Fine Foods together contributed significant sales in the quarter. Overall, the company is focusing on its acquisition strategies and increasing its market share while improving operational efficiency of its businesses. In fact, these positives have the potential to offset the declining gross margin pressure faced by the company./ Equity Research / UNFI | Page 1
SUMMARY DATA
52-Week High / $82.2052-Week Low / $58.62
One-Year Return (%) / 18.72
Beta / 0.52
Average Daily Volume (sh) / 267,566
Shares Outstanding (mil) / 50
Market Capitalization ($mil) / $4,110
Short Interest Ratio (days) / 13.48
Institutional Ownership (%) / 97
Insider Ownership (%) / 6
Annual Cash Dividend / $0.00
Dividend Yield (%) / 0.00
5-Yr. Historical Growth Rates
Sales (%) / 16.1
Earnings Per Share (%) / 13.1
Dividend (%) / N/A
P/E using TTM EPS / 31.4
P/E using 2015 Estimate / 27.8
P/E using 2016 Estimate / 24.6
Zacks Rank *: Short Term
1 – 3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Below Avg.,
Type of Stock / Large-Blend
Industry / Food-Misc/Dvrsd
Zacks Industry Rank * / 216 out of 267
OVERVIEW
Headquartered in Dayville, CT, United Natural Foods, Inc. is the leading distributor of natural, organic and specialty food and non-food products in the U.S. and Canada. The company has 32 distribution centers and serves more than 40,000 customer locations. The company carries more than 80,000 high-quality natural, organic and specialty products, consisting of national, regional and private label brands in six product categories. The categories include: grocery and general merchandise, produce, perishables and frozen foods, nutritional supplements and sports nutrition, bulk and foodservice products and personal care items.
Customers include independently owned natural product retailers, including buying clubs; supermarket chains, comprising solely of Whole Foods Market, Inc; conventional supermarkets and mass market chains, and others, which include food service and international customers outside of Canada.
United Natural’s operations comprise three principal operating divisions:
Wholesale division: It broadly includes natural, organic and specialty distribution businesses in the U.S. It is further divided into UNFI Canada, which is the natural, organic and specialty distribution business in Canada; Tony's Fine Foods, which is a leading distributor of a wide array of specialty protein, cheese, deli, food service and bakery goods, principally throughout the Western United States; Albert's Organics, Inc. ("Albert's"), which is a leading distributor within the United States of organically grown produce and non-produce perishable items, and Select Nutrition, which distributes vitamins, minerals and supplements.
Retail division:It operates through Earth Origins, which operates 12 natural products retail stores within the U.S.
Manufacturing division:It consists of the Woodstock Farms Manufacturing, which specializes in international importation, roasting, packaging and distribution of nuts, dried fruit, seeds, trail mixes, granola, natural and organic snack items and confections. It also operates Blue Marble Brands, which has a collection of 15 organic, natural and specialty food brands.
REASONS TO BUY
Market Leader in Providing Organic Products: United Natural is the leading distributor of natural, organic and specialty food and non-food products in the U.S. and Canada and owns more than 80,000 products. The company provides an innovative service offering, a broad array of products and an extremely efficient distribution model.
In recent years, sales to existing and new customers have increased owing to the continued growth of the natural and organic products industry. The growth rate of the natural products industry has outpaced the growth of the overall food-at-home industry as a result of increasing demand for a healthy lifestyle, food safety and environmental sustainability. This rapid adoption rate of organic products has led to new opportunities for United Natural and has resulted in increased shelf-space across a growing number of retailers.
Also, United Natural’s Albert’s Organics and Woodstock Farms Manufacturing divisions have been delivering impressive results in the last few quarters. Woodstock Farms has gradually become an industry leading processor and packager of high growth organic nuts, granola and dried fruit; and is currently producing products in a wide variety of packs and sizes for many of the country’s leading retailers under their brands. Additionally, the Blue Marble Brands division is continuously adding value through the expansion of its independent only Field Day brand, which was designed to provide high quality, lower cost organic products exclusively to this channel.
Distributes Specialty Food Products to Capture Market Share: In the face of rising demand of specialty foods market, the company has accelerated its distribution of specialty food items including ethnic, kosher and gourmet products, and expanded into a number of high-growth business markets. This has not only allowed the company to capture market share but also provided an opportunity to do business with a number of conventional supermarkets. Over the next several years, the company expects to build out its Gourmet & Ethnic Channel which will focus on merchandising specialty products to specialty based retailers. These products include Italian, Hispanic, [Kosher] Asian and other related ethnic products which are growing rapidly.
Acquisitions Driving Growth: The company has been carrying out various acquisitions over the years to grow its distribution network, customer base and boost long-term growth. The acquisition of Canadian food distribution assets of SunOpta Inc. in Jun 2010 made the company the largest distributor of natural, organic and specialty foods, including kosher foods in Canada.
United Natural’s major acquisition was that of Minnesota-based Trudeau Foods in Sep 2013. Trudeau Foods is a distributor of specialty perishables and dry products. The acquisition helped the company to expand its products in the markets of Minnesota, North Dakota, Wisconsin and Michigan’s Upper Peninsula, where Trudeau Foods has a presence.
The acquisition of Tony’s Fine Foods (in Jul 2014), a specialty distributor of perishable food products, has helped the company in expanding both the high-growth perishable product offerings and the company’s distribution footprint in the western region of the United States. The company expects Tony's Fine Foods acquisition to be the prime driver of revenues in 2015, fueled by high demand for perishable specialty products.
The company is looking for further opportunities in the upcoming quarters to enhance its position within the natural and organic industry in the U.S. and Canada and to increase its market share in the specialty products industry.
Initiatives to Improve Operating Efficiencies: United Natural has been working toward improving its operational efficiencies and has made solid progress since fiscal 2013. In fiscal 2014, operating expenses as a percentage of sales decreased 30 basis points year over year, while it declined 69 basis points last fiscal year. In fiscal 2014, the company controlled fuel costs despite rising prices by updating and revising existing routes, reducing idle times and through other similar measures.
The company expects to reduce its operating expenses further through the rollout of supply chain initiatives. This includes a national warehouse management and procurement system (‘WMS’) to convert its existing facilities into a single warehouse management and supply chain platform. The company has completed WMS system conversions at the Lancaster, Texas, Ridgefield, Washington and Auburn, Washington facilities, and expects to complete the rollout of all existing facilities by the end of fiscal 2017.
United Natural has also opened many distribution centers to streamline its operations, improve efficiencies and meet the increasing demand for products across the country.These steps and others are intended to improve operational efficiencies and further reduce operating expenses.
RISKS
Declining Gross Margins: The company’s gross margins have been declining over the last one year due to a change in the company’s sales mix. Generally, the grocery distribution industry is characterized by relatively high volume of sales with relatively low profit margins. Also, gross profits are higher on sales to independently owned retailers and lower on sales in the conventional supermarket and the supernatural channels. Also, higher out of stocks resulting in higher inbound freight expense negatively impacts the overall gross margin. In addition, higher sales to Whole Foods Market are expected to generate lower gross profit percentages. We would re-consider our recommendation if the decline in gross margin continue to hamper earnings, going forward.
Sole Distributor to Whole Foods Market: United Natural depends excessively on its sole customer Whole Foods Market.The company has been the primary distributor to Whole Foods Market for more than 16 years and has extended the partnership agreement till 2020. With the acquisition of Tony’s Foods, the company is also selling certain specialty protein, cheese, and deli items to certain Whole Foods Market stores in California and other states in western United States. Whole Foods Market was Tony's largest customer in 2014. We would re-visit our recommendation if the dependency on Whole Foods Market continues to increase.
RECENT NEWS
United Natural’s First Quarter Earnings Beat on Robust Acquisitions – Dec 05, 2014
United Natural delivered upbeat first quarter fiscal 2015 earnings of $0.66 per share, which beat the Zacks Consensus Estimate of $0.63 by 4.8% and the prior year adjusted earnings of $0.56 by 17.9%. Earnings were driven by top-line growth and robust acquisitions.
Revenue and Margin Details
Net sales for the quarter increased 24.4% year over year to $1.99 billion and exceeded the Zacks Consensus Estimate of $1.95 billion by 1.8%. The results were driven by continuous increase in demand for the company’s organic and natural food products and robust acquisitions. Trudeau Foods (acquired in the first quarter of fiscal 2014) and Tony’s Fine Foods (acquired during fourth quarter fiscal 2014) together contributed significant net sales of approximately $227.7 million. Excluding acquisitions, sales grew 10.2% during the quarter.
Supermarket sales increased 30.6% in the first quarter and represented 27% of total sales. Supernatural channel sales increased 16.5% and represented 33% of sales in the first quarter of fiscal 2015. Sales growth in the Independent channel was 23.8% and it constituted approximately 33% of total sales. Food service comprised approximately 4% of total sales and increased 60.4% in the first quarter.
Gross margin declined 92 basis points to 16.0% in the reported quarter. The main reason for the decline was due to the impact of lower gross margin associated with Tony’s Fine Foods. The remainder was mostly due to unfavorable customer mix, higher freight costs and currency headwinds.
The company’s adjusted operating expenses increased 16.8% in the first quarter to $262.5 million. However, adjusted operating income margin declined 4 basis points to 2.9% due to gross margin pressures.
Fiscal 2015 Guidance
United Natural also reiterated its guidance for fiscal 2015. It continues to expect sales in the range of $8.13 billion to $8.38 billion. This marks an increase of 19.7% to 23.7% over fiscal 2014 sales of $6.79 billion. The company continues to expect Tony's Fine Foods acquisition to be the prime driver of revenues in 2015, fueled by high demand for perishable specialty products.
The company estimates earnings for fiscal 2015 in the range of approximately $2.88 - $3.01 per share. This marks an increase of approximately 14.3% to 19.4% over fiscal 2014 earnings of $2.52 per share.
The company believes that the strategy to sell stores to existing customers as well as infrastructure improvements should drive 10% to 14% revenue growth, 10% to 16% EBIT growth, generate free cash flow of $30 million to $85 million per year and lead to EPS expansion of 14% to 19% per year over the next five years.
VALUATION
United Natural’s current trailing 12-month earnings multiple is 31.4x, representing a premium of 34.8% to the industry average of 23.3x. Over the last five years, United Natural’s shares have traded in the range of 19.1x to 32.6x trailing 12-month earnings. Based on 2015 earnings estimate of $2.96, the stock is trading at 27.8x, a 4.1% discount to the industry average of 29.0x. Our target price of $99.00 is based on approximately 33.4x our 2015 earnings estimate.
At the end of the fourth quarter fiscal 2014, the P/B multiple of the stock was approximately 3.0x, representing a discount of 21.1% to the industry average of 3.8x. On a P/B basis, the price target of $99.00 is based on a P/B multiple of approximately 3.9x.
Currently, United Natural carries a Zacks Rank #3 (Hold).
Key Indicators
Earnings Surprise and Estimate Revision History
DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of UNFI. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1005 companies covered: Outperform - 14.5%, Neutral - 77.3%, Underperform – 7.7%. Data is as of midnight on the business day immediately prior to this publication.
Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatnghaility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.
Research Analyst / Sneha NahataCopy Editor / Debasmita Banerjee
Content Ed. / Shikha Kansal
QCA / Kinjel Shah
Lead Analyst / Sneha Nahata
Reason for Update / 4Q14Earnings
/ Equity Research / UNFI | Page 1