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Factors That Make United Natural (UNFI) a Promising Pick

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·5 min read
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United Natural Foods, Inc. UNFI looks well positioned, courtesy of strength in the Fuel the Future strategy and growth pillars. The company’s solid e-commerce business and prudent acquisitions are driving growth. Accelerating inflation and business gains from existing and new customers, including benefits from cross-selling, are also working well for the company. The impact of these upsides was visible in the company’s third-quarter fiscal 2022 results, with net sales and earnings increasing year over year and beating the Zacks Consensus Estimate.

Management anticipates net sales in the band of $28.8-$29.1 billion for fiscal 2022. At the midpoint, the metric suggests a 7% rise from the fiscal 2021 reported levels. The company anticipates fiscal 2022 adjusted earnings in the band of $4.65-$4.90 per share. At the midpoint, the metric indicates a 14% rise from the fiscal 2021 reported levels. In its last earnings call, management highlighted that many people continue to work from home and utilize flexible working methods. These factors and tight control of household budget amid escalated food inflation are likely to keep demand for food-at-home solid.

The Zacks Rank #2 (Buy) company’s shares have gained 9.3% in the past year against the industry’s 11.5% decline. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Growth Initiatives on Track

United Natural has been benefiting from its Fuel the Future strategy, unveiled in June 2021. Management is on track to increase market share via network optimization, solid innovation and a better customer experience. In its last earnings call, the company highlighted that it focuses on four areas to execute the Fuel the Future strategy and achieve its fiscal 2024 financial targets. The four priorities include a focus on delivering major value to its customers, improving the way of partnering with suppliers, providing associates with unmatched career opportunities and supporting communities and the planet. The company is inclined to improve every aspect of its sales and supply chain execution to deliver products and services to its customers. In this regard, the company’s one-UNFI initiative has been gaining traction. We note that management expects to achieve average annual growth rates for net sales of 3-5%, adjusted EBITDA of 6-10% and adjusted earnings EPS of 12-18% in fiscal 2024.

United Natural is on track to undertake growth initiatives under its future pillar that includes brands, professional services and fresh. As part of growing its brands business, management is making progress with the three-pronged strategy based on deepening its penetration with existing customers, introducing owned brands to new customers and channels and undertaking customer-friendly innovations. The company is on track to expand its professional services by bringing new ideas to its customers. Lastly, the company is on track to invest in its people, infrastructure and technology as part of its fresh growth pillar.

Acquisitions Driving Growth

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 been aiding United Natural’s performance. Moreover, the merger has provided better-competing grounds to the company in the grocery space by augmenting offerings.

Several other companies in the food space are benefiting from acquisitions like McCormick & Company MKC, Hormel Foods Corporation HRL and The Hershey Company HSY. McCormick increased its presence through acquisitions to enhance its portfolio. MKC bought a 100% stake in FONA International, LLC and some of its affiliates. FONA’s diverse portfolio helps McCormick bolster its value-add offerings and expand the flavor solutions segment into attractive categories. In November 2020, McCormick completed the acquisition of the parent company of Cholula Hot Sauce — a premium Mexico-based hot sauce brand.

Hormel Foods is strengthening its business on the back of strategic acquisitions. In June 2021, the company acquired the Planters snacking portfolio. Prior to this, HRL acquired Texas-based pit-smoked meats company Sadler's Smokehouse in March 2020. The buyout is in sync with Hormel Foods’ initiatives to strengthen its position in the foodservice space.

Hershey is undertaking buyouts to augment portfolio strength and boost revenues. In December 2021, Hershey acquired Dot’s Pretzels LLC — the owner of Dot’s Homestyle Pretzels — a leading brand in the pretzel category. The addition of Dot’s Pretzels is a perfect match for HSY’s growing salty snacking portfolio. The company also acquired Pretzels Inc. from an affiliate of Peak Rock Capital. The acquisition expands Hershey’s snacking and production capabilities.

E-commerce Strength

United Natural’s sales are benefiting from e-commerce strength, thanks to increased e-commerce solutions offered by the company. Incidentally, several of the company’s Independents channel and a Chains channel provide e-commerce solutions to their customers. Further, United Natural offers digital platforms and the support needed by its customers. Management is on track to roll out additional marketing and analytics capabilities to further improve customers’ brand experience. United Natural is keen on strengthening its e-commerce business.

We believe that robust online business and the aforementioned upsides will likely continue enhancing UNFI’s growth prospects in the future.


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