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United Natural (UNFI) More Than Double in 3 Months: Here's Why

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United Natural Foods, Inc. UNFI appears to be in solid shape, with its shares more than doubling in the past three months compared with the industry’s growth of 6.4%. The company has been gaining on increased demand amid the pandemic-induced higher at-home consumption. Also, strength in the e-commerce business is a driver. These upsides, together with reduced costs boosted second-quarter fiscal 2021 results, with the top and the bottom line increasing year over year. Additionally, the bottom line exceeded the Zacks Consensus Estimate.

Moreover, United Natural expects food-at-home consumption to stay high in fiscal 2021. A number of food companies like The J.M. Smucker SJM, Kellogg K and TreeHouse Foods THS to name a few have been gaining on increased pandemic-led demand. Meanwhile, United Natural reiterated its fiscal 2021 view when it reported second-quarter results, though it stated that it expects adjusted EPS and adjusted EBITDA to come in at the upper end of the previous guidance. Encouragingly, the Zacks Consensus Estimate for fiscal 2021 has jumped 7.8% in the past 30 days to $3.46 per share. Let’s delve deeper into the company’s upsides.

Factors Behind United Natural’s Growth Story

The company is benefiting from solid retail demand amid the pandemic. Further, strength in e-commerce operations has been a major driver. Incidentally, 70% of the company’s Independents channel and a greater proportion of Chains channel now provide e-commerce solutions to their customers. Impressively, its e-commerce sales surged 97% in the second quarter of fiscal 2021 on the back of new business and higher sales to the biggest e-commerce player. Retail channel e-commerce sales remained strong, with about a 190% jump at Cub. The company has seen a number of new customers on its e-commerce platform since the beginning of the pandemic and it expects these trends to continue.

Moving in line with strengthening its e-commerce business, United Natural plans to soon launch a new platform, Community Marketplace — which will be an extension to its Easy Options B2B solution. Through this marketplace, smaller emerging brands can be ordered and shipped to retail customers directly in the United States. This is likely to provide the company’s customers access to an increased brand assortment. Apart from this, United Natural’s On a Screen platform is noteworthy.

Net sales from continuing operations came in at $6,888 million in the second quarter of fiscal 2021, which advanced 7.1% year over year, marking an increase of 110 basis points from a 6% rise in fiscal first quarter. Sales growth was backed by robust customer demand from existing as well as new retailers, including continued gains of cross-selling. Markedly, cross-selling initiatives generated additional sales worth nearly $90 million in the second quarter and United Natural expects to generate cumulative cross-selling revenues of $1 billion by the end of fiscal 2022. We note that the company is gaining business in all categories such as fresh and general merchandise, grocery, frozen, center store and others.

United Natural’s adjusted earnings of $1.25 per share cruised past the Zacks Consensus Estimate of 92 cents. Moreover, the bottom line rose significantly from 25 cents reported in the year-ago period. The year-over-year surge can be attributed to greater net sales and improved operating income. Adjusted operating margin increased from 0.84% to 1.79%, courtesy of higher net sales, increased gross margin, reduced benefit costs and fixed operating expense leverage on increased sales.

What’s Ahead?

The company expects at-home consumption to outpace away-from-home consumption in through fiscal 2021. Incidentally, work-from-home trends are likely to stay for a while. Also, a number of Americans are focused on managing their household budget efficiently, as part of which they opt for reasonable options like dining at home. Apart from these, increased demand for better food options with ingredient transparency works well for United Natural. Certainly, United Natural is committed to optimizing distribution networks, creating increased operating benefits to its Value Path initiative, curtailing the cost structure and making technology-related investments.

Also, management is encouraged about its recently extended deal with its biggest customer — Whole Foods Market. Per the deal, the term of the primary distribution agreement between United Natural and Whole Foods is now extended till Sep 27, 2027. All said, management anticipates fiscal 2021 net sales of $27-$27.8 billion. This suggests 3.3% growth over fiscal 2020 at the midpoint. United Natural expects adjusted EBITDA toward the upper end of the previous guidance of $690-$730 million that indicates a 5.5% rise over fiscal 2020 at the midpoint. Also, it envisions adjusted earnings to come in at the higher end of its earlier guidance of $3.05-$3.55 per share, which indicates an increase of 21.3% from fiscal 2020 levels at the midpoint.

All said, we believe that the Zacks Rank #2 (Buy) company is set to keep its robust show on. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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