Why United Natural Foods Stock Is Spoiling

Source: Thinkstock

Source: Thinkstock

United Natural Foods Inc. (NYSE:UNFI) just missed on its earnings, and the stock is getting pummeled after it narrowed its guidance. Is this an opportunity or is the stock spoiling at these levels?

The company itself distributes and retails natural, organic, and specialty foods, as well as non-food products primarily in the United States and Canada. The company distributes approximately 65,000 products in six product categories, including grocery and general merchandise, produce, perishables and frozen foods, nutritional supplements and sports nutrition, bulk and food service products, and personal care items. It operates thirteen natural products retail stores in the United States and has one natural products retail store in British Columbia.

The company is also involved in importing, roasting, packaging, and distributing nuts, dried fruits, seeds, trail mixes, granola, natural and organic snack items, and confections. Its customers include independently owned natural products retailers, supernatural chains, conventional supermarkets, and mass market chains, as well as foodservice and international customers outside Canada. The stock currently trades at $64.99, and I think it is heading lower on the back of reduced guidance.

The company saw net sales for the third quarter of fiscal 2014 increase 13.8 percent to $1.78 billion from $1.57 billion in the third quarter of fiscal 2013. The quarter included incremental net sales of approximately $18.0 million, or 1.2 percent, resulting from the company’s acquisition of Trudeau Foods in the first quarter of fiscal 2014. Gross margin was 16.7 percent for the third quarter of fiscal 2014 compared to 16.8 percent for the third quarter of fiscal 2013. Gross margin was negatively impacted primarily by foreign exchange from the declining value of the Canadian dollar on the company’s Canadian business. Total operating expenses were 13.2 percent as a percentage of net sales for the third quarter of fiscal 2014, a decrease of 13 basis points compared with the same period last fiscal year. Operating expenses included non-recurring costs of approximately $0.9 million related to the start-up of the company’s Wisconsin facility in addition to $0.6 million of acquisition costs related to the recently announced agreement to purchase of Tony’s Fine Foods.

Operating income increased 16.3 percent, or $8.8 million, to $62.6 million compared to $53.9 million for the third quarter of fiscal 2013. Operating income as a percentage of net sales increased 7 basis points to 3.5 percent compared to the same period last fiscal year. Net income $4.8 million, or 15.1 percent, to $36.4 million, or $0.73 per diluted share, from $31.6 million, or $0.64 per diluted share last year.

Steven Spinner, president and CEO, said, “Each of our sales channels continued to benefit from consumers increasingly choosing better-for-you natural, organic and specialty foods as illustrated by our second consecutive quarter of net sales growth in excess of $200 million. To support these positive growth dynamics and enhance service levels to our customers, in the fourth quarter, we opened our distribution center in Racine, Wisconsin and we are scheduled to open our Hudson Valley, New York facility in the first quarter of fiscal 2015.”

What is really hurting the company and the reason I am recommending a sell is that based on the performance to date and the current outlook for the remainder of fiscal 2014, the company is narrowing and updating its previous guidance for fiscal 2014. For fiscal 2014 the company expects net sales in the range of approximately $6.73 to $6.77 billion, an increase of approximately 11.0 percent to 11.6 percent over 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 percent to 13.8 percent. 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 percent to 14.7 percent over fiscal 2013 GAAP earnings per diluted share of $2.18.

Given the stock is already expensive at 24 times earnings, a reduction in guidance is a kiss of death for a low margin company such as United Natural Foods. I think the stock will pull back significantly from current levels.

Disclosure: Christopher F. Davis holds no position in United Natural Foods and has no plans to initiate a position in the next 72 hours. He has a sell rating on the stock and a $56 price target.

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