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Can United Natural (UNFI) Spring a Surprise in Q2 Earnings?

Zacks Equity Research

United Natural Foods, Inc. UNFI is set to report second quarter of fiscal 2017 results on Mar 7 after the market closes. The question lingering in investors’ minds is, whether the company will be able to maintain its positive earnings surprise streak in the to-be-reported quarter.

We note that the company has outpaced the Zacks Consensus Estimate in three of the trailing four quarters, with an average positive surprise of 5.92%.

United Natural forms part of the Consumer Staple sector. Per the latest Zacks Earnings Preview, we note that the above mentioned sector’s earnings growth looks impressive. As of Mar 1, 93.8% companies from the consumer staples sector enlisted on the S&P 500 have reported Q4 earnings. Out of these, 56.7% of the companies have posted an earnings beat while only 36.7% have surpassed revenue estimates. Total earnings for the sector are estimated to grow 10.8%, while revenues are projected to improve 4.7%.

Let’s delve deeper how things are shaping up for this announcement.

Which Way Are Estimates Trending?

Let’s look at earnings estimate revisions in order to get a clear picture of what analysts are thinking about the company right before the earnings release. The current Zacks Consensus Estimate for the quarter under review has remained unchanged over the past 30 days and is currently pegged at 50 cents, up 1.4% from 49 cents delivered in the year-ago quarter. Analysts polled by Zacks expect revenues of $2.34 billion, up 14.1% from the prior-year period.

United Natural Foods, Inc. Price, Consensus and EPS Surprise


United Natural Foods, Inc. Price, Consensus and EPS Surprise | United Natural Foods, Inc. Quote

What the Zacks Model Unveils?

Our proven model does not conclusively show that United Natural is likely to beat earnings estimates this quarter. This is because a stock needs to have both a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP for this to happen. You may uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

United Natural has an Earnings ESP of 0.00% as both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 50 cents. United Natural carries a Zacks Rank #2, which increases the predictive power of ESP. However, we also need a positive ESP for an earnings beat.

Concurrently, we caution against Sell-rated stocks (#4 or 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Factors Influencing the Quarter

United Natural’s productivity initiatives, improved operational efficiency, acquisitions and continuous increase in demand for organic and natural food products have been the strength of the company. We believe the trend is expected to improve in the to-be-reported quarter.

In the past 12 months, United Natural has acquired four exciting and uniquely positioned companies – Haddon House specialty foods, Global Organic, Nor-Cal and Gourmet Guru. With these acquisitions in its kitty, United Natural is now positioned as a large national provider of fresh produces, proteins, bakery, deli, specialty and natural products.

The uptrend is also reflected in United Natural’s share prices over the past one year. Notably, in the said period the stock has climbed 27% in comparison to the Zacks categorized Food-Miscellaneous/Diversified industry, which showcased growth of 6.1%.

Though encouraged by increasing consumer demand for organic products, which is being driven by growing awareness of a healthy lifestyle, food safety and environmental sustainability, we can’t ignore the fact that the company has been struggling with continued margin weakness over the past few quarters. This is due to a shift in the customer mix to the lower-margin supermarket channel. In fact, the company’s recent acquisitions, despite being accretive to the top line, are exerting pressure on margins. Deflationary pressures are also hurting the produce and protein categories.

Nevertheless, we believe that these concerns will be short lived, leaving room for the company to rebound over the long run and survive the ongoing challenges.

Stocks to Consider

Stocks in the broader retail sector carrying both a positive Earnings ESP and a favorable Zacks Rank and therefore worth considering include:

ConAgra Foods, Inc. CAG has an Earnings ESP of +4.44% and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Post Holdings, Inc. POST has an Earnings ESP of +1.67% and carries a Zacks Rank #2.

Constellation Brands Inc. STZ has an Earnings ESP of +2.94% and carries a Zacks Rank #2.

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