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United Natural Gains 28% in 3 Months: Buyouts a Key Driver

Zacks Equity Research

United Natural Foods, Inc. UNFI is gaining momentum on the back of improvement across sales channels supported by strong brands, efficient strategies, robust consumer demand and benefits from buyouts. Currently, the company’s top line is significantly benefiting from the SUPERVALU buyout.

Backed by these factors, United Natural delivered sturdy second-quarter fiscal 2019 results, wherein the top and bottom lines surpassed the Zacks Consensus Estimate. Earnings also improved on a year-over-year basis. Additionally, the company updated its view for the fiscal year. (Read: United Natural Beats on Q2 Earnings, Sales Up Y/Y)

As a result, the Zacks Consensus Estimate has been witnessing an uptrend. We note that the consensus mark for the current and next quarter of fiscal 2019 has moved north by 5 cents and 11 cents to 53 cents and 44 cents, respectively, over the past 30 days.

In the past three months, shares of this Providence, RI-based company have rallied roughly 28.4%, outperforming the industry’s 7.5% growth.

Let’s delve deeper to find out the factors driving this Zacks Rank #2 (Buy) stock’s performance.

Factors Driving United Natural’s Performance

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 second quarter of fiscal 2019, SUPERVALU contributed approximately $3.47 billion to United Natural’s top line. Prior to this, SUPERVALU contributed approximately $224 million in the first quarter. The enhanced scale of the combined entities is expected to consistently boost operational efficiencies. Moreover, the transaction is expected to provide better-competing grounds to United Natural in the grocery space. Also, the company is on track with the divestiture of the retail assets of SUPERVALU to focus on profitable areas.

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. Further, it 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.

However, United Natural is grappling with an unfavorable shift in consumer mix for a while. The downside can be attributed to lower margin customers that are growing at a higher rate than other customers. This is also denting its gross margin rate for a while. Furthermore, the company is experiencing challenges at several distribution centers due to headwinds such as store closures and a slower rate of growth at new stores.

Nevertheless, we expect the afore-mentioned strategic endeavors to offer an adequate cushion to the stock and help sustain momentum.

Other Key Picks

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

Sysco Corporation SYY has a long-term earnings growth rate of 10.3% 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 7.3% and a Zacks Rank #2.

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