United Natural Foods: Undervalued Assets And Cash Flow Leave A Clear Runway To A Stock Price Increase

seekingalpha08-27

UNFI is a Strong Buy due to potential improvements in revenue, capital expenditures, and EBIT margins.The company could sell overlapping distribution centers to generate liquidity for debt repayment ...

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(NYSE:NYSE:UNFI) is a Strong Buy due to multiple factors converging together to create a runway for UNFI to take off from. Right now relatively small improvements to the company's revenues or capital expenditures would be enough to significantly improve the upside of the company's cash flow potential. Resulting from a Pre-COVID acquisition of a company called SUPERVALU, UNFI currently has multiple distribution centers that overlap the company's strategic shipping locations. These distribution centers could be sold off without major disruptions to UNFI's revenue streams. The company could use the liquidity from these real estate sales to pay off the company's outstanding debts or to spend on carrying out some of the company's current business objectives including finally fully integrating the business's SUPERVALU brand in with the rest of company. The reason I have so much conviction that any of these scenarios are likely to happen is because UNFI has added some relatively new members to its management team including Sandy Douglas as CEO, Giorgio “Matteo” Tarditi as CFO, and an activist investor James C. Pappas to the Board of Directors that all seem to be focused on cutting costs, automating their distribution centers when it makes sense, developing high margin low cost revenue streams, and creating shareholder value. One of the ways the new management team plans to generate revenue while creating value for both its shareholders and the company's suppliers is by rolling out a \"Simplified Supplier Agreement\" (SSA). This agreement essentially consolidates the fees suppliers are subject to by UNFI while giving these suppliers access to an array of logistical data about their product as it moves through the distribution process. These consolidated fees should smooth out UNFI's revenues while having all of the company's suppliers on the same logistics software should help UNFI move product through its distribution centers more seamlessly. which should help prevent things like over supply and out of stock products. If UNFI can catch any one of these business tailwinds I believe the company's stock price could soar alongside the future success of the business. About United Natural Foods, Inc. United Natural Foods was founded in 1976 and is headquartered in Providence, Rhode Island. UNFI distributes natural, organic, specialty, produce, and conventional grocery and non-food products in the United States and Canada through the company's two main business segments wholesale and retail.   UNFI LOGO (UNFI.com) Through its wholesale segment the company serves chains, independent retailers, natural and organic food chains, as well as foodservice, ecommerce, and conventional military business. UNFI's retail segment derives its revenues through the sale of groceries and other products at retail locations operated by the Company. The company owns two retail chains Cub Foods and Shoppers grocery. UNFI operates 78 of these stores and each one covers approximately 50,000 to 70,000 square feet of space and holds 17,000 to 21,000 core SKU's of product. In total UNFI distributes approximately 250,000 products to 30,000 customers from 55 distribution centers that make up approximately 30 million square feet of warehouse space. UNFI has an other business segment that groups its other business operations that don't meet the quantitative thresholds to justify putting them into their own segment. These other businesses activities include running the company's natural food brands including Blue Marble and Wild Harvest. UNFI's other segment also runs a single location food manufacturing business called Woodstock Farms Manufacturing that imports, roasts, packages, and distributes nuts, dried fruit, seeds, trail mixes, granola, natural and organic snack items, and confections. Whole Foods Market, Inc., owned by Amazon (NASDAQ:AMZN) made up approximately 21% of UNFI's sales in 2023. These two company's grew up together so to speak and the success of UNFI has been in large part due to the success of Whole Foods. No other customer makes up more than 10% of the company's sales.   United Natural Foods' Fiscal 2023 UNFI has seen its revenues increase year over year from $26.95 billion in 2021 to $28.93 billion in 2022 to $30.27 billion in 2023. Despite this 4.6% increase in revenue from 2022 to 2023 the company's expenses have been growing faster. UNFI's cost of sales were $23.11 billion in 2021, $24.75 billion in 2022, and $26.14 billion in 2023.   UNFI's 2023 Consolidated Statement Of Operations (UNFI's 2023 10-K) Operating expenses have predictably increased over the past three years from $3.59 billion in 2021 to $3.83 billion in 2022 and $3.97 billion in 2023. All of this led to a 71.6% decrease in operating income from 2022 to 2023 from $423 million to $120 million and a 90.3% decrease in net income from $248 million to $24 million. UNFI was able to reduced their long-term debt by 7.1% from $2.11 billion in 2022 to $1.96 billion in 2023. This in turn helped to reduce the company's total liabilities by 3.3% from $5.84 billion to $5.65 billion.   UNFI's 2023 Liabilities (UNFI's 2023 10-K) United Natural Foods' Fiscal 2024 Thus far in UNFI's fiscal 2024 the company has finally started experiencing a drop in sales exacerbating the company's deteriorating business situation. UNFI's continued growth in sales was prolonging the company's narrowing profitability and now that the company's sales have ceased to grow the company's Consolidated Statement of Business Operations went from bad to worse. The company's operating expenses continued to rise from $2.97 billion in 2023 to $3.03 billion in 2024 while UNFI made only $6.0 million in operating income instead of the $195 million the company had already made at this point in time during the company's fiscal 2023. That's a 2.0% increase in the cost of sales and a 96.9% decrease in operating income. This led UNFI to finally show a net income loss of $75 million in the first 39 weeks of its fiscal 2024 compared to a $92 million gain in 2023.... or a 181% decrease.   UNFI's 2024 Q3 Consolidated Statement Of Operations (UNFI's 2024 Q3 10-Q) The company has also managed to further increase its long-term debt by 9.7% from $1.96 billion in 2023 to $2.15 billion so far in 2024.   UNFI's 2024 Q3 Liabilities (UNFI's 2024 Q3 10-Q) Despite all of the bad news so far in 2024 I do believe the current management team is working hard and making strides to turn UNFI's current business situation around. As I will demonstrate a bit later in this article, small changes to UNFI's operations have the potential to increase the cashflow potential of this company enormously. Key Players In Management Sandy Douglas Sandy Douglas is the CEO of UNFI and has held this position as well as a board member position since August of 2021. In October of 2023 Sandy assumed the role of President and CEO of UNFI. Sandy spent 30 years at Coca-Cola (NASDAQ:COKE) eventually working his way up to President of Coca-Cola North America before leaving the company in 2018 to become a CEO at Staples where he worked until coming to UNFI. Working at Coca-Cola gave Sandy the kind of experience someone needs to handle complicated supply chains and supplier agreements. Joining UNFI after the COVID pandemic had already began, Mr. Douglas and the rest of the UNFI's management team were unable to focus all of their efforts on restructuring how the company was ran and instead had to focus considerable amounts of their time on handling supply chain shortages. Now that supply chain problems have significantly lessened and business environments have become a bit more predictable, management has stated that they can begin working on things like finally fully integrating their SUPERVALU brand in with the rest of the company instead of running them like two separate enterprises. Management has also spoken a lot on their earnings calls about focusing intently on lowering the company's working capital and capital expenditures. Integrating SUPERVALU in more completely with the rest of the company can add operational efficiency by consolidating managerial roles or condensing warehouse space from newly acquired distribution centers by closing centers that overlap the company's strategic shipping locations. Giorgio Matteo Tarditi Matteo has served as UNFI's CFO and President since April of 2024. Before joining UNFI Matteo spent 26 years at the General Electric Company (NYSE:GE) serving the company under an assortment of capacities. Matteo served as CFO for seven of GE's business units including Renewable Energy and Energy Connections and for large divisions of the Power, Oil & Gas, Aerospace, and Healthcare businesses. He is a Lean Six Sigma Black Belt and has helped implement various programs to help improve forecast accuracy, accountability, and continuous improvement during his time at GE. James C. Pappas James joined UNFI in September of 2023. Before that he worked in the Investment Banking and Leveraged Finance Division of Goldman Sachs(NYSE:GS) from 2005 to 2007. While at Goldman James advised private equity groups and corporations on appropriate leveraged buyout, recapitalization, and refinancing alternatives. From 2007 to 2009 Pappas spent his time private investing as well as being a consultant for several businesses. Since 2009 James has owned his own investing firm called JCP Investment Management. James is currently also a board member of TLF  Tandy Leather Factory, Inc. (NASDAQ:TLF) and Innovative Food Holdings, Inc. (OTCQB:OTCQB:IVFH). He has held a seat at Tandy Leather since 2016 and at Innovative Food Holdings since 2020. Pappas had previously held board seats at various other food company's including Jamba, Inc., The Pantry, Inc., and Morgan’s Foods, Inc. all of which should give him a lot of insight on running a variety of complex businesses in the food industry.  Thoughts on Management And How They Are Implementing Changes These three relatively newcomers to UNFI bring with them a lot of talent and experience. Sandy and Matteo talk non-stop on their earnings calls about reducing costs long term by implementing efficient streamlined processes that everyone involved within this complex food distribution supply chain can utilize. One of the ways UNFI's management is implementing these changes is by consolidating the company's supplier fees into one flat rate (provided these suppliers stay within a set performance threshold) that reduces the time the company has to spend administering fees to its suppliers. This should not only free up employees and management to perform new tasks it should also make UNFI's revenues more predictable. This fee also gives UNFI's suppliers access to data they can use to improve supply chain efficiencies when they move product through one of UNFI's distribution centers. The other way management is hoping to turn around UNFI's current business troubles is to implement more automation in their distribution centers when and where it makes sense to improve the company's efficiencies. The company is also looking into ways to potentially consolidate its distribution centers when it makes sense to do so as well. After the company's acquisition of SUPERVALU there may be opportunities to sell off distribution centers and then ship those products out of other facilities close by. Giving suppliers access to crucial data and automating facilities will both play key roles in UNFI's ability to move more product through fewer distribution centers and allow them to consolidate the company's assets. If UNFI can successfully pull this off the company should be able to reduce its overhead costs significantly and well into the future. The Centralia, WA center is a good example of UNFI pulling this off. It consolidated five distribution centers into one building which is now a flag ship for the company's future automation changes. Already management plans on spending $70 million less on capital expenditures in 2025 then the $370 million they plan on spending in their fiscal 2024. I expect there are more places to improve efficiencies as this talented new team gets to work.   United Natural Foods' Discounted Cash Flows My reasoning for placing a Strong Buy rating on UNFI is the company is undervalued is so many ways. Looking at a discounted cash flow analysis for UNFI can help give us a better picture at just how undervalued the company actually is. I ran a couple of different DCFs in order to showcase how undervalued the company is based off of its historical company performance and based off changes that we can expect to be made at the company. Included in these changes is a roll out of analytical software and a consolidation of supplier fees in the company's brand new Simplified Supplier Agreement. These changes also include significantly decreasing the company's working capital and capital expenditures by consolidating some of their distribution centers after the company acquired the brand SUPERVALU before COVID but never had a chance to fully integrate it in with the rest of the company as UNFI had been battling supply chain problems for the last several years. Now that our supply chains have normalized a bit and UNFI has gained a plethora of new managerial talent, the company has been actively working to integrate SUPERVALU into the rest of UNFI in a way that creates long-term value for the company's shareholders. For both of UNFI's DCFs I assumed the company would pay a 25% tax rate. I assumed the end year figure for UNFI's fiscal 2024 revenues to be the company's current TTM revenue figures. For 2025 I assumed the company would then have another decrease in year over year revenue from $30.24 billion to $30.00 billion before growing at a 4.5% rate through 2033 after which a 2.0% perpetual growth rate is assumed for UNFI's revenues. Depreciation and amortization expenses were assumed at $308 million per year and it was assumed the company's change in working capital as a percentage of their revenue was to increase by 5.0% a year over this time period. I also kept the company's capital expenditures at $322 million a year through 2033. Although the company's capital expenditures will increase as a company normally grows, UNFI is likely to downsize its foot print over the next several years to get rid of assets it doesn't need that would otherwise contribute to the company's consumption of capital and therefore I am leaving this figure stable to account for the initial lowering of capital expenditures and then the likelihood that they'll rise up closer to the company's current capital expenditures once again. United Natural Foods' Discounted Cash Flow #1 The only figure I altered between UNFI's DCFs would be the company's EBIT margins. For UNFI's first DCF I kept their EBIT margins at 1.2% which is the company's average margins since 2019 including the company's current TTM EBIT margin average.   UNFI's 1st DCF (Leland Roach) As you can see when we run these numbers through our first DCF we come to the conclusion that UNFI's current share price is fairly valued at just a couple of cents higher than our target share price of $13.24 per share at $13.26 per share. United Natural Foods' Discounted Cash Flow #2 The only change I made between UNFI's first and second DCF is to increase the company's EBIT margins from 1.2% of revenues to 1.5% of revenues. This EBIT margin increase is extremely likely to happen as UNFI rolls out its Simplified Supplier Agreement that essentially places a 2.5% fee on the products that pass through UNFI's distribution centers. This fee (up to a certain extent) consolidates all of the fines suppliers would pay for things like late load ins or for trucks that don't show as well as, provide suppliers with a bunch of analytical data these company's can use to efficiently sell their products and avoid things like out of date products and shrink. This agreement and new technology UNFI is rolling out is being done with the intent of creating low overhead high margin revenues that will in turn increase supplier efficiency which in turn will further increase UNFI's revenues. A 1.5% EBIT margin for UNFI would essentially just put the company back in line with its 2020, 2021, and 2022 EBIT margins and it is likely that this new agreement could boost the company's margins even higher.   UNFI's 2nd DCF (Leland Roach) When we take into account this very small change in UNFI's future EBIT margins the company's target share price jumps all the way up to $26.32 a share. This is an astounding 98.5% increase from the company's current share price of $13.26 per share. I would be unsurprised if UNFI's future margins end up rising to 1.7% or even 2.0% and settling there. Simplified Supplier Agreement (SSA) This consolidated fee I mentioned earlier is known as the Simplified Supplier Agreement (SSA) and UNFI will charge a 2.5% flat fee. Suppliers will pay a flat rate of 2.5% of all purchases barring some exclusions. These exclusions include UNFI's military purchase program, products intended for sale in Canada, as well as private label products. This fee also covers the cost of giving suppliers' access to analytical data to support their business relationship with UNFI. This data is supposed to help UNFI's suppliers view insights on how fast products are moving through distribution, how fast products have historically moved through the supply chain, and what estimated future demand may look like among other features. By forcing the majority of UNFI's suppliers over to this agreement and essentially making sure everyone is making decisions using the same pieces of data, UNFI hopes it can foster a smoother and more efficient product flow from supplier to end customer. By doing so UNFI should be able to free up warehouse space to move more product through. When company's are all gathering their business data separately, it can create large discrepancies on the accuracy and quality of data from one supplier to the next. If however, all of these suppliers are basing there decisions off of the same sets of information a much greater deal of efficiency should be achievable, especially on the distribution end of things. Some of UNFI's suppliers had already previously had access to these pieces of information from either Supplier in Site or for a 1.5% fee via a contract with ClearVue but steering almost all of UNFI's suppliers on to both of these data platforms should work wonders to help streamlines UNFI's distribution business. UNFI began charging suppliers this fee on May 1st 2024. This means the first results of this program should be present on UNFI's next financial report. This fee will be charged to suppliers quarterly and UNFI's suppliers can not opt out of this program. This will likely make a some of UNFI's suppliers unhappy however, suppliers are bound by contract to accept this condition. Breaking a contract from one of the country's largest food distributors is not a realistic option for most of UNFI's suppliers as this might entail legal action against them or make other distribution companies wary about entering into a new contract with a supplier that had previous dishonored previous distribution contracts. Furthermore UNFI's largest competitor KeHE charges similar fees and therefore suppliers looking for an alternative may find themselves stuck between a rock and hard place. The convenient thing about flat rate fees is that they don't rack up a lot of accounting and management costs keeping track of them and therefore a 2.5% fee on almost all product purchases should instantly boost UNFI's EBIT margins. Just a 0.5% increase to the company's EBIT margins should justify a 98.5% increase in the price of the stock. Having this implemented before the end of the company's fiscal 2024 should hopefully rid fiscal 2025's financial statements from the major expenses associated with rolling out new policies such as this. That would give UNFI a clean runway to improved margins for their fiscal 2025 and beyond.   United Natural Foods' Asset Sale Value   Another predominant reason for my Strong Buy rating for UNFI is the enormous amount of value the company has stored away in its assets. Below I have put together a little excel chart to summarize what the value of UNFI's assets versus the value of the company's liabilities might look like per share if the company was to sell itself off. As you can see from the chart below, I left out the value of UNFI's goodwill from my asset value assumptions as goodwill is obviously not something you can physically sell. I also left out UNFI's deferred income taxes from the company's total asset value as this isn't something that would likely transfer over if the company was sold off. Other long-term assets were also left off of this list as many of these might be long term investment that likely wouldn't achieve their full value potential if UNFI had to exit these investments prematurely.   UNFI's Asset Sale Value (Leland Roach) After adding up UNFI's assets, excluding the categories mentioned above, I then subtracted the company's total liabilities to get a total asset value of $1.45 billion. Divide this pre-tax asset value by the company's 59.47 million shares currently outstanding and we get a value of $24.33 per share. That's an 83% upside from UNFI's current share price of $13.26 a share. While it is clear that UNFI would have to pay taxes if it had to sell off parts of its business I am not including any form of tax analysis from a sale of the company on this article because it's actually pretty obvious that the true value of UNFI's assets are likely much greater than what is recorded on UNFI's balance sheet, specifically the company's property, plant, and equipment section. As is commonly known, GAAP accounting dictates that buildings be recorded at the value they were purchased at. With the price of real estate skyrocketing just in the past five years alone I believe it is safe to say that UNFI's buildings are worth a lot more than what they are marked down as. The company owns 13.3 million square feet of distribution center warehousing space and 1.19 million square feet of retail grocery store space. Even if UNFI was only able to sell these properties (not including equipment) at $100 a square foot the company would still get $1.45 billion for them. That figure alone is enough to make up 81% of the company's property, plant, and equipment balance sheet segment. When Would I Sell My Shares Of UNFI? I would sell my stock in UNFI if the company did not see meaningful improvements to their EBIT margins throughout their fiscal 2025. UNFI's software rollout and the subsequent SSA fee should be enough to raise the company's EBIT margins alone. The added cost cutting and focus on A.I. powered robotics integration at several of the company's key distribution facilities should also lower costs and allow the company to consolidate its distribution centers, driving down costs long-term. While these factors have an enormous potential to meaningfully drive down costs for UNFI there are also major risks the company faces in implementing these changes. Automating large buildings is risky and can include all sorts of unforeseen problems or delays in a businesses' ability to operate normally. Adding A.I. technology which is still in its infancy to the process of robotics automation could easily multiply any problems or hang ups UNFI might have implementing these new process changes into its business model. Companies may not use the software made available to them through this SSA fee which would negate the potential benefits that having all of your suppliers on one software platform could create and therefore fail to help raise margins. Company's could attempt to switch distributors after their contracts with UNFI end if they strongly oppose this new fee. I think this last scenario is less likely to happen in a volume that would have a meaningful impact on the company strictly due to UNFI's immense size and because its next largest competitor KeHE hands out similar fees to its suppliers. Conclusion I believe that UNFI is a Strong Buy due to the large amount of structural changes being made to the company. With CEO Sandy Douglas now out of the supply chain nightmare that was the COVID-19 pandemic, he can now focus on long-term value creation for the company. With the addition of James C. Pappas to the board of directors and Giorgio Matteo Tarditi as CFO I think UNFI has put the right talent in place with knowledge very specific to the unique challenges of the food and grocery industry. The added revenue and lowered expense costs that UNFI's SSA agreement will likely provide for the company should be enough in themselves to justify a buy rating. When also factoring in the added cost savings that future distribution center automation and consolidation could bring about, UNFI appears to have set itself up for real long-term value creation.  Currently it doesn't appear that the market has priced in any of these potential outcomes for UNFI as the stock sits at $13.26 a share. I suspect that once and if UNFI starts posting increased revenue from their fees, increased margins from their cost cutting efforts, and returns back to profitability, the share price could spike dramatically. If UNFI fails to increase their revenues, raise margins, and return to profitability by the time they post their 10-K for the company's fiscal 2025... then I would probably sell this stock off. UNFI's 2025 should begin to show a major improvement in operations for the company and if all goes well then we should be looking at long-term value creation. If the fruits of management's best efforts fail to bring forth results over the course of 2025 however, management would have to go back to the drawing board to come up with new or further structural changes to the business. Another transformation or pivot in how UNFI operates would probably come with further expenses that could harm the prosperity of the company's future business results.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":1,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2462944902"}