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United Natural Down 37% in 3 Months: Is a Revival Likely?

Zacks Equity Research

United Natural Foods, Inc. UNFI is losing footing in investors’ books, thanks to headwinds such as dismal gross margin, supply chain hiccups and high labor cost. Moreover, management’s dismal view for the current fiscal is a downturn. Shares of this Providence, RI-based company have lost approximately 37%, underperforming the industry’s 2.4% growth.

Nevertheless, all doesn’t appear gloomy for this Zacks Rank #3 (Hold) stock. The company is witnessing growth across sales channels, supported by strong brands, efficient strategies, robust consumer demand and benefits from buyouts. Let’s take a closer look at both sides of the story.



 

Hurdles in United Natural’s Path

United Natural’s gross margin has persistently remained weak, thanks to lower contributions from SUPERVALU and shift in consumer mix. In the third quarter of fiscal 2019, the company’s gross margin contracted 219 basis points year on year to 15.4%. Dismal gross margin along with higher operating expenses weighed on the company’s adjusted operating income during the third quarter.

The company has been experiencing challenges at several distribution centers, driven by headwinds such as store closures and slower rate of growth at new stores. These are largely due to sluggish rate of growth for some of the top customers of the company. Moreover, the challenges across some of the distribution networks have led to enhanced transportation, labor and shrink costs.

Additionally, management’s updated bottom-line view for fiscal 2019 has been a letdown. United Natural expects the metric to be at a loss of $5.65-$5.85. Earlier, management projected adjusted earnings of $2-$2.40. Also, the company now anticipates adjusted EBITDA to be at the lower end of the earlier guided range of $580-$610 million.

Can Efforts Aid a Turnaround?

United Natural has been on an acquisition spree over the years in a bid to expand its distribution network and customer base. Some of the notable buyouts include Haddon House, Gourmet Guru, Nor-Cal Produce, Tony’s Fine Foods and Trudeau Distributing Company among others.

Moreover, United Natural completed the buyout of SUPERVALU in October 2018. During the third quarter of fiscal 2019, SUPERVALU contributed approximately $3.24 billion to United Natural’s top line. Prior to this, SUPERVALU contributed approximately $3.47 billion and $224 million in the second and first quarter, respectively. Moreover, the merger has provided better competing grounds to United Natural in the grocery space by augmenting offerings.

Apart from this, the company is committed toward certain strategic plans such as enhancing customer base, expanding the company’s broadline distribution channel and improving profitability. Also, United Natural is continuously witnessing solid demand for its better-for-you products. It also strives to develop effective sourcing processes and supply chain networks so as to better align supplies with demand and thereby meet consumers’ needs more efficiently.

United Natural is also focused on cost-reduction efforts. It is on track to achieve cost savings of more than $36 million in fiscal 2019. Additionally, management retained long-term target of more than $185 million in cost savings by the end of fiscal 2022. The company expects to achieve such savings targets through the reduction of square footage occupied among other efforts to optimize spending.

Backed by these aforementioned tailwinds, we expect the company to return on growth trajectory.

Key Picks

Medifast, Inc. MED has a long-term earnings growth rate of 20% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Campbell Soup Company CPB has a long-term earnings growth rate of 5% and a Zacks Rank #2.

General Mills, Inc. GIS delivered average positive earnings surprise of 11.1% in the trailing four quarters. It has a long-term earnings growth rate of 7% and a Zacks Rank #2.

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United Natural Foods, Inc. (UNFI) : Free Stock Analysis Report
 
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