United Natural Foods, Inc. UNFI is on a solid footing, thanks to its key strategic endeavors and strength in the supernatural channel. Further, the company has lately been riding on burgeoning demand stemming from the coronavirus-led pantry loading of essential items. Notably, demand for United Natural’s products shot up in mid-March and remained high, thereby boosting its sales and earnings in the third quarter of fiscal 2020.
Courtesy of these factors, shares of the company have soared 86% in the past three months compared with the industry’s growth of 4.5%. Let’s delve deeper into the factors, which are likely to help the company counter escalated cost woes.
Growth Strategies on Track
United Natural is committed toward certain strategic targets that include plans, such as enhancing the customer base, expanding its broad line distribution channel and improving profitability. To this end, the company is focusing on creating a sustainable and solution-based supply chain network. The company strives to develop effective sourcing processes to better align supplies with demand, and thereby meet consumers’ needs more efficiently.
In a recent move, the company announced a long-term supply deal extension with National Co+op Grocers (“NCG”), with which it has been working since 1999. Per the latest agreement extension, United Natural will continue serving as the main grocery wholesaler and national distributor for affiliated retail food co-ops of NCG. Additionally, the company has been undertaking various acquisitions over the years to expand its distribution network and customer base and boost long-term growth. In this regard, United Natural completed the buyout of SUPERVALU in October 2018. The enhanced scale of the combined entities has aided the company’s performance and provided it better-competing grounds by augmenting its offerings.
We note that United Natural’s Supernatural channel has been witnessing robust growth for a while. In the third quarter, Supernatural net sales rose more than 16% year over year, continuing its robust trend that was further enhanced by the coronavirus-led demand. Management had earlier stated that it is optimistic about its prime delivery across several markets globally in this channel.
Coronavirus-Led Demand & Solid View
During the third quarter, earnings gained on higher sales and fixed cost leverage, while sales were backed by robust coronavirus-led demand, including gains from cross-selling and solid performance of private brands. These trends continued in the fourth quarter, with wholesale net sales for the first four weeks of the quarter up approximately 11%. Notably, the company is on track to generate cross-selling revenues of more than $175 million this year. United Natural’s ability to cater to the rising demand amid the pandemic reflects its robust market position and the important role it plays in North America’s food supply chain.
Even TreeHouse Foods THS, Kraft Heinz KHC and Flowers Foods FLO benefited from the burgeoning demand stemming from the coronavirus-led stock hoarding. Meanwhile, United Natural expects demand for its natural, fresh and conventional products to remain high. This along with integration synergies related to Supervalu is expected to help the company end fiscal 2020 on a strong note. In its third-quarter conference call, it provided an updated view that reflects the impact of including Retail in continuing operations.
For fiscal 2020, management now anticipates net sales of $26.4-$26.6 billion compared with $23.5-$24.3 billion projected during the second-quarterearnings call Adjusted EBITDA is now anticipated in a band of $655-$670 million, up from the previous view of $520-$560 million. The company now envisions adjusted earnings per share of $2.30-$2.50, significantly higher than the old guidance of 85 cents to $1.45. Notably, the consensus mark for fiscal 2020 earnings per share has moved north by 36.4% to $2.40 over the past 30 days.
Will Cost Hurdles be Offset?
Incidentally, in third-quarter fiscal 2020, the company’s gross margin contracted 37 basis points (bps) to 12.85% due to an unfavorable mix shift toward lower margin conventional products and reduced vendor funding. Apart from this, the company witnessed operating costs of $20 million related to COVID-19. These include costs to maintain additional safety, increased labor costs to manage higher volumes, and payments and incentives to frontline workers amid the pandemic. Nonetheless, we believe that the abovementioned upsides are likely to help United Natural tide over these hurdles and help this Zacks Rank #3 (Hold) company retain its growth story.
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United Natural Foods, Inc. (UNFI): Free Stock Analysis Report
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