United Natural Foods Stock Forecast

Jan 25, 2020

Originally Posted On: https://financhill.com/blog/investing/united-natural-foods-stock-forecast

United Natural Foods Stock Forecast: Natural and organic foods have been a trend for a while now. Many investors have started to jump on board, hoping to capitalize on the industry. While there may still be room for upside, you never want to invest without doing your homework, especially in a stock that is tied to a way of life.

After all, people change and values shift. A person who wants natural food today may decide tomorrow that the price tag is too high or may opt to buy from small farms instead.

What Does United Natural Foods Do?

United Natural Foods [UNFI] is a wholesale distributor that deals in natural foods.

The company, which is based in Minnesota and Rhode Island, serves roughly 43,000 customers in Canada and the US, and they handle more than 110,000 products.

United Natural differentiates itself through a selection of quality products, offering a wide variety, and providing value-added support to its customers.

The company operates in six segments:

Grocery and general merchandise;
Produce;
Perishables and frozen food;
Nutritional supplements;
Bulk food service; and,
Personal care.

United Natural also provides its customers with marketing services. Its customer portfolio includes Whole Foods as well as Fresh Market, Hannaford, Stop & Shop, Wegmans, Sprouts, Kroger, Harris Teeter, Giant Eagle, and Shop-Rite amongst others.

In recent years, United Natural’s strategy has been to grow its market share through acquisition, expanding its distribution network, and providing a wide variety.

It has also developed its own lines of products, which includes Culinary Circle, Wild Harvest, Springfield, Essential Everyday, Arctic Shores Seafood, Stone Ridge Creamery, and Shopper’s Value.

In October 2018, United Natural acquired SUPERVALU, which added some 32 million sqft to the company’s warehouse spaces and 63 new distribution centers. With the added capacity, United Natural has five goals:

– Putting food safety and integrity above all

– Financials: specifically, this includes integrating SUPERVALU into a meaningful, synergy-producing acquisition, boosting sales through cross-selling, and then using that cash to reduce its debt

– Selling its portfolio of products more effectively

– Deploying Thrive 2: this is an integrated work stream that is designed to streamline interactions between customers and suppliers

– Divesting certain assets

Ultimately, this means that the company is working on streamlining everything, offloading less successful assets, and using the cost savings to pay down debt.

Is United Natural Foods Stock a Buy?

This company has an impressive client list and a fiscally responsible strategy in place. That said, the natural foods business is not for the faint of heart.

Organic food has been such big business that it has triggered a rash of consolidation and ramped up competition within the industry.

It isn’t actually a whole lot different from tech. For a company to become organic, it has to meet all sorts of criteria. Getting there is often so expensive, it is a labor of love – not so different from a tech person creating an app.

Big companies find it easier, faster, and cheaper to buy an existing solution instead of developing it themselves – in this case, natural foods.

The problems come after the dust settles.

Assuming that growth for the industry remains consistent or otherwise doesn’t shrink, the companies that did all the acquisitions have to find ways to make all their acquisitions work well together. This often means restructuring operations and cutting the fat.

United Natural is doing that. The strategic foci that the company outlines in directly in line with this reality.

The WSJ said the company is one of the most effectively managed in the country and it has won awards for is sustainable management practices.

United Natural is also pushing towards developing the customer experience into something more effortless thanks to technology as well as improving its logistics network, developing value-added services like marketing, and providing a wide range of products.

Risks of Buying United Natural Foods?

These factors paint a promising picture for United Natural, but there are several risk factors to keep in mind.

First, consider the nature of the grocery business – it is very low margin. Customers want high quality food products for a minimal cost. That constricts what United Natural can charge for its goods.

At the same time, the company can’t even rely too much on bulk costing or synergies. Supermarket chains often handle their own distributions and may even focus on local providers. A company like United Natural faces a ton of competition and its industry is somewhat faddish. Natural food rends come and go. United Natural has to foresee these shifts and be prepared.

The company has also been on an acquisition spree. The success of those purchases will only be as good as those acquisitions are integrated into company operations. United Natural has to align those efforts and realize those synergies while managing its growth.

Then, there are United Natural’s customer relationships to consider. One of the biggest issues facing the company is its relationship with Whole Foods. Counting the organic super chain now owned by Amazon as a customer is truly a feather in the cap of any natural foods company, but the sheer size of their relationship may be an issue.

Take a look at United Natural’s annual report and the first risk factor you will see listed is the company’s relationship with Whole Foods.

United Natural is the primary distributor. If Whole Foods stopped needing as much stock or decided to manage its own distributions, if physical locations close or Whole Foods is otherwise unable to maintain AND INCREASE its purchases from United Natural, the company is going to hurt.

Likewise, if Whole Foods customers start buying less, United Natural will feel it in its bottom line. Per the annual report, “if Whole Foods Market were to only purchase the minimum purchase amounts under our agreement with them, it would negatively impact our financial results.”