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A Solid Investment Opportunity In The Natural And Organic Food Sector

June 15, 2014 | About:

Natural and organic food is the fastest-growing sector in the American food marketplace. Since 2000, the United States has seen organic food sales growth as people are now much more health conscious as the rate of obesity is accelerating at a great pace. U.S. consumers are concerned about exposure to toxins in non-organic foods, and this has paved the way to a decline in the consumption of the same. Organic foods are foods that are produced using methods that do not involve modern synthetic inputs such as pesticides and chemical fertilizers. These products are more nutritious than other food. According to the Organic Trade Association, domestic organic food production has increased about 240% between 2002 and 2011, compared with 3% in the non-organic food market. A chart has been provided below to show the increasing organic food sales in the U.S.

Chart from statista.com

One great player in this organic food industry is United Natural Foods, Inc. (NASDAQ:UNFI). With a market cap of $3.12 billion, the company is a distributor of natural, organic and specialty foods, and non-food products in the United States and Canada. The company serves more than 31,000 customer locations over 65,000 different products. This Providence, Rhode Island- based company serves as the main distributor to Whole Foods Market, Inc. (NASDAQ:WFM) which represented 36% of United Natural Foods' revenue last year. The company also has long-term contracts with Costco Wholesale Corporation (NASDAQ:COST), and The Kroger Co. (NYSE:KR).

Tracking the Performance

On Jun. 10, 2014, this organic food player reported its financial results for the third quarter of fiscal 2014 ended May 3, 2014. Net sales for the quarter increased 13.8% year over year to $1.782 billion from $1.57 billion in the third quarter of fiscal 2013. The reason behind this positive result is continuous increase in demand for the company’s organic and natural food products. On Sep. 26, 2013, United Natural Foods has acquired Trudeau Foods, LLC to grow its market share and deliver a complete basket of specialty, natural and organic products to its customers. The acquisition proved to be a right move as the company’s third quarter included incremental net sales of approximately $18.0 million, or 1.2%. The gross margin was 16.7% compared to 16.8% for the third quarter of fiscal 2013. The company’s gross margin for the third quarter was negatively impacted primarily by foreign exchange from the declining value of the Canadian dollar on the Company's Canadian business.

United Natural Foods’ Operating income increased 16.3%, or $8.8 million, to $62.6 million for the third quarter compared to $53.9 million for the third quarter of fiscal 2013. Total operating expenses were 13.2% as a percentage of net sales for the third quarter of fiscal 2014. Net income for the third quarter increased $4.8 million, or 15.1%, to $36.4 million, or $0.73 per diluted share, from $31.6 million, or $0.64 per diluted share, for the third quarter of fiscal 2013.

What’s Next

Guidance for fiscal 2014 provided on March 10, 2014 by United Natural Foods has been has been revised. The company now expects net sales in the range of approximately $6.73 to $6.77 billion, an increase of approximately 11.0% to 11.6% over fiscal 2013 (including the additional week in fiscal 2013). Adjusting for $118.7 million of net sales for the 53rd week in fiscal 2013, net sales growth for fiscal 2014 is expected to be in the range of approximately 13.2% to 13.8%. The company estimates GAAP earnings per diluted share for fiscal 2014 in the range of approximately $2.47 to $2.50 per share, an increase of approximately 13.3% to 14.7% over fiscal 2013 GAAP earnings per diluted share of $2.18. Further, a chart has been provided below to show UNFI’s long-term financial goals.

Solid Growth

As the natural and organic food sector is booming, United Natural Foods is playing strategically to strengthen its market share. Company’s growth strategy includes expanding customer base, increasing market share of existing customers’ business, improving the efficiency of its distribution network, expanding into other distribution channels and geographies, and to pursue its opportunistic acquisitions. Further, the company has the capacity and ability to deliver products to different channels at the quickest possible time.

On May 22, 2014, United Natural Foods has announced the acquisition of Tony’s Fine Foods, a leading distributor of perishable food products including a wide array of specialty protein, cheese, deli, food service and bakery goods throughout the Western United States, as well as Alaska and Hawaii. A chart has been provided below to show the company’s recent strategic acquisitions.

On a Concluding Note

United Natural Foods has a history of sustained growth and has been delivering strong results for the last few quarters which are shown below.

Charts from company website

Over 34 years in business, the company has long stood customer relationship. Its strength can be seen in multiple areas such as solid working capital management, efficient distributor, a market leader with a nationwide presence in the U.S. and Canada, attractive market fundamentals- large, growing and fragmented, and experienced, motivated management team and associates. Further, the company’s Trudeau acquisition has helped to expand its wings in the regions where Trudeau dominated (Minnesota, North Dakota, Wisconsin, and Michigan’s Upper Peninsula). United Natural Foods will further increase its market share in the specialty products industry after acquiring Tony’s Fine Foods. Therefore, I believe that this company has a great investment opportunity in the long run.

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