We reaffirm our Neutral recommendation on
United Natural Foods, Inc.
) following an appraisal of its third quarter fiscal 2013
results, wherein strong demand for organic foods was overshadowed
by weak margins.
Why the Reiteration?
On May 28, United Natural delivered third quarter fiscal 2013
results with earnings growth of 8.5%, driven by top-line growth.
Net sales also grew 12.8% year over year driven by continuous
increase in demand for the company's organic and natural food
products and increased sales within the conventional supermarket
channel. United Natural's earnings and revenues beat the Zacks
Consensus Estimate in the quarter.
United Natural managed to grow its market share as a result of
its continued focus on value added services and broader selection
of products, including specialty foods. In addition to organic
sales growth, United Natural also benefited from the inclusion of
$12.5 million in incremental sales related to the acquisition of
certain assets of three distributors completed during the first
quarter of fiscal 2013. Food price inflation of approximately
1.8% also contributed to sales growth in the quarter.
However, increase in freight expenses and shift in customer
mix to lower-margin conventional supermarkets led to a gross
margin contraction of 83 basis points in the quarter. In fact,
this shift in consumer mix has been negatively impacting the
company's gross margins over the past several quarters. Operating
margin also declined 6 basis points in the reported quarter due
to higher operating expenses.
The continued increase in demand for natural and organic foods
led the company to raise its sales guidance for fiscal 2013. The
company now expects sales in the range of $6.03 billion - $6.06
billion, compared with the previous range of $5.88 billion -
However, the company expects most of the net sales growth to
occur in the lower gross margin supernatural and conventional
supermarket channels in fiscal 2013, which led the company to
narrow the company's adjusted earnings guidance in the range of
$2.15 to $2.17 per share, compared with the previous guidance of
approximately $2.15 to $2.21 per share.
Overall, we remain impressed with the company's decision to
divest the company's non-foods and general merchandise lines that
has allowed it to concentrate on its core business of the
distribution of natural, organic, and specialty foods. However,
United Natural remains severely impacted by the continued shift
in the company's customer mix to lower-margin conventional
supermarkets, which has been impacting its gross margins since
the last few quarters.
Other Stock to Consider
United Natural currently carries a Zacks Rank #2 (Buy). Other
stocks in the food industry worth considering are
Nash Finch Co.
Fairway Group Holdings Corp.
Green Mountain Coffee Roasters, Inc
). While Nash Finch holds a Zacks Rank #1 (Strong Buy), Green
Mountain and Fairway hold a Zacks Rank #2.
FAIRWAY GROUP (FWM): Free Stock Analysis
GREEN MTN COFFE (GMCR): Free Stock Analysis
NASH FINCH CO (NAFC): Free Stock Analysis
UTD NATURAL FDS (UNFI): Free Stock Analysis
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