United Natural Foods, Inc. (UNFI) Beats On Earnings; Affirms View

Specialty foods distributor, United Natural Foods, Inc. (UNFI) delivered first quarter fiscal 2014 earnings of 56 cents per share, which beat the Zacks Consensus Estimate of 54 cents by 3.7%. Earnings surged 21.7% year on year from prior year adjusted earnings of 46 cents, driven by top-line growth, cost control initiatives and improved gross margin.

Revenue and Margin Details

Net sales for the quarter were almost in line with the Zacks Consensus Estimate but increased 13.6% year over year to $1.6 billion. The results were driven by continuous increase in demand for the company’s organic and natural food products and robust acquisitions. The company continued to focus on its core strategies to further increase market share while improving the operational efficiency of the businesses.

Sales to the supernatural channel increased 12.6% while independent sales increased 8.9% year-over-year. The supermarket channel witnessed growth of 19% over the prior year in the first quarter of fiscal 2014 and foodservice sales grew 26.2% over the prior year.

During the quarter, United Natural acquired Trudeau Foods, a Minneapolis based distributor of natural, organic and specialty food products. The company’s acquisitions made in the past one year (including Trudeau Foods) contributed $10.7 million to the company’s sales in the first quarter.

Gross margin improved 20 basis points to 16.9% from the year-ago period, primarily due to improvements in logistics efficiencies. The company’s management has been constantly focusing on increasing service level, reducing carbon footprint and other freight costs, which helped boost gross margins. However, gross margin declined 40 basis points sequentially primarily due to the unfavorable shift in customer mix to lower-margin conventional supermarket and supernatural channels.

The company’s productivity initiatives helped reduce operating expense ratio in the first quarter. This along with gross margin growth boosted operating income margin. Operating income margin increased 29 basis points to 3.0% in the reported quarter.

Fiscal 2014 Guidance Reiterated

United Natural reiterated its earnings and sales guidance for fiscal 2014. The company expects net sales in the range of approximately $6.65 to $6.78 billion, an increase of approximately 11.8% to 14.0% over fiscal 2013 (excluding the additional week in fiscal 2013). The company also expects reported earnings for fiscal 2014 to range between approximately $2.40 to $2.50 per share. This marks an increase of approximately 10.1% to 14.7% over fiscal 2013 reported earnings of $2.18 per share.

Our Take

We believe that United Natural has taken the inorganic route to grow its distribution network and customer base and boost long-term growth. The Trudeau acquisition is a strategic fit for United Natural which is looking to enhance its position and increase its market share in the specialty products industry. The acquisition will also help United Natural to expand its products in the markets of Minnesota, North Dakota, Wisconsin and Michigan’s Upper Peninsula, where Trudeau Foods has a presence.

Earlier in Jun 2010, the acquisition of certain Canadian food distribution assets of SunOpta Inc. made the company the largest distributor of natural, organic and specialty foods, including kosher foods, in Canada.

With the increasing demand for a healthy lifestyle, food safety and environmental sustainability, the demand for organic products is growing rapidly. Moreover, it is believed that the growth rate of the natural products industry has outpaced the growth of the overall food-at-home industry.

United Natural currently holds a Zacks Rank #3 (Hold). Some better-ranked stocks in the food industry worth considering are Omega Protein Corp (OME), ConAgra Foods Inc. (CAG) and Pinnacle Foods Inc (PF). While Omega Protein holds a Zacks Rank #1 (Strong Buy), ConAgra and Pinnacle Foods hold a Zacks Rank #2 (Buy).