Food distributor United Natural Foods (UNFI, Financial) reported a 10.8% revenue increase to $6.9 billion and 0.2% creep in profits to $91.3 million in its fiscal 2017 third quarter, representing a margin of 1.3% compared to 1.5% in the same period last year.
The company estimates net sales in the range of $9.29 billion to $9.34 billion in the fiscal year ending July 29, an increase of 9.7% to 10.3% over fiscal 2016.
United Natural Foods also estimated its GAAP (generally accepted accounting principles) earnings per diluted share (EPS) for fiscal 2017 in the range of $2.49 to $2.54 compared to fiscal 2016 GAAP earnings per diluted share of $2.50 – a 0.6% EPS growth on midpoint comparison.
“I am pleased with our team’s ability to execute and manage our business well through a deflationary and challenging retail environment.
“Over the past few months, we have worked diligently and made progress against our strategic initiatives, such as driving greater efficiencies across our internal operations, integrating our acquisitions and having our united sales team sell across all of United Natural Foods' brands.” – Steven L. Spinner, chairman and CEO
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Valuations
United Natural Foods is undervalued compared to its peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 14.5 times vs. the industry median of 20.5 times, a price-book (P/B) ratio of 1.1 times vs. the industry’s 1.8 times and a price-sales (P/S) ratio of 0.2 times vs. 0.5 times.
Meanwhile, the company has not provided any dividends in the past decade (Morningstar data).
Average 2017 sales and company EPS expectations indicated forward multiples of 0.2 times and 14.4 times.
Total returns
United Natural Foods has provided total negative returns of 7.9% and 24.4% in the past half decade and year to date (Morningstar). The Standard & Poor's 500 index, meanwhile, provided total returns of 15% and 9.7%.
United Natural Foods
According to filings, United Natural Foods is a leading distributor based on sales of natural, organic and specialty foods and nonfood products in the U.S. and Canada. The company traces its origins from its predecessor in 1976.
In addition, the United Natural Foods’ distribution centers –Â approximately 8.7 million square feet of warehouse space –Â provide it with the largest capacity of any North American-based distributor principally focused on the natural, organic and specialty products industry.
In review, United Natural Foods has been the primary distributor to Whole Foods Market (WFM, Financial) for more than 18 years. The company’s agreement with Whole Foods Market expires on Sept. 28, 2025.
United Natural Foods has one segment: wholesale. Nonetheless, the company also provided its “Other" segment.
Wholesale
The wholesale segment is engaged in the national distribution of natural, organic and specialty foods, produce and related products in the U.S. and Canada.
In the past nine months, revenue in the wholesale business grew by 11% to $6.9 billion and delivered an operating margin of 2.6% compared to 2.7% in the same period last year.
Other
According to filings, its other segment includes a retail division, which engages in the sale of natural foods and related products to the general public through retail storefronts on the east coast of the U.S., a manufacturing division that engages in importing, roasting and packaging of nuts, seeds, dried fruit and snack items and the company's branded product lines.
Other also includes certain corporate operating expenses that are not allocated to operating divisions.
In the recent three quarters, revenue in the Other segment fell by 2.8% to $176.7 million and reported operating losses of $12.8 million compared to $5.16 million in losses in the same period last year.
Sales and profits
In the past three years, United Natural Foods’ revenue increased by 11.8% on average, while profits rose by 5.3% on average and profit margin by an average of 1.7% (Morningstar).
Cash, debt and book value
As of April, United Natural Foods had $16.1 million in cash and cash equivalents and $164.9 million in debt with debt-equity ratio 0.10 times compared to 0.12 times in the same period last year. The company reduced its debt by $13.2 million year over year while having increased its equity by $138.8 million.
Of United Natural Foods’ $2.92 billion assets 20%Â were identified as goodwill and intangibles. The company also increased its book value by 9.3% year over year to $1.63 billion.
Cash flow
In the recent three quarters, United Natural Foods’ cash flow from operations declined by 20.7% to $163.1 million year over year. As observed, the company has experienced higher cash outflow in its accounts receivables, inventories, prepaid expenses and accrued expenses and other liabilities resulting in lower cash flow in the period.
Capital expenditures were $40 million leaving United Natural Foods with $123.1 million in free cash flow compared to $176.5 million in the same period last year. The company has not provided any dividend payments or buybacks in the past decade.
United Natural Foods also allocated $130.7 million in debt repayments, net any proceeds from issuance.
Conclusion
Despite the difficulties and usually thin margins in the grocery business, United Natural Foods exhibited strong sales growth and nearly flat profit growth in its recent nine months operations. In addition, the company expects a year-over-year recovery for its fiscal 2017 EPS.
Meanwhile, United Natural Foods has a good number of blue sky elements –Â goodwill and intangible assets –Â in growing its book value. In addition, the company had inconsistent positive free cash flow in recent years.
Another concern could also be that United Natural Foods derived 35% or $2.96 billion of its net sales in fiscal 2016 from the recently acquired Whole Foods Market.
Thirteen analysts have an average price target of $42.92 a share –Â 18.9% upside from today’s share price of $36.1 (at the time of writing). Applying three-year revenue growth and P/S averages followed by a 20% margin would indicate a value of $2.53 billion or $50 per share.
Ignoring any threats from the recent acquisition, United Natural Foods is a buy with $43 per share target price.
Disclosure: I do not have shares in any of the companies mentioned.
