United Natural Foods: Still Tasty As Earnings Near Based On Improving Guidance

seekingalpha11-21 23:34

United Natural Foods remains a 'buy' due to its undervalued stock and management's optimistic forecast for improved bottom-line performance in fiscal year 2025.Despite recent revenue growth, the ...

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Tom Werner/DigitalVision via Getty Images  It seems like just yesterday that I last wrote an article about United Natural Foods (NYSE:UNFI). For those that don't know about the company, it operates as a major distributor of grocery and non-food products. The company has grown to service over 30,000 customer locations in the markets in which it operates. And to those customers, it provides 250,000 products ranging from frozen foods to perishables to personal care products and more. In total, the company achieves this through its 55 distribution centers and warehouses that total about 31 million square feet in size. Even though it seems like I just wrote about the company not long ago, my last article about it actually came out way back in September of 2023. Prior to that, I had the company rated a ‘strong buy’. But eventually, I ended up downgrading it to a ‘buy’ instead. Since then, shares have outperformed the market by a bit. The stock is up 46% while the S&P 500 is up 39.2%. Even after that meaningful increase at a time when fundamentals showed signs of deterioration, I believe that keeping the firm rated a ‘buy’ at the moment makes sense. A big part of my stance on the matter relates to how cheap shares remain. However, it's also worth noting that management is forecasting improvements on the bottom line for this year compared to last year. This makes the stock even cheaper on a forward basis. But of course, the picture can always change. The fact of the matter is that, before the market opens on December 10th, management will be reporting financial results covering the first quarter of the company's 2025 fiscal year. The good news is that, across the board, analysts expect better results than what was achieved last year. So long as this comes to pass and so long as guidance is not revised materially lower, my bullish position on the company will remain unchanged. United Natural Foods is still tasty Before I get into what analysts are currently anticipating for the quarter, I do think it would be valuable to touch on financial performance achieved by the company in recent years. Particularly, my interest is on the 2023 to 2024 windows of time. Year over year, revenue for the company inched up by 2.3% from $30.27 billion to $30.98 billion. Most of this increase for the company was actually the result of an extra operating week. Stripping this out would remove $582 million from the company's top line for the 2024 fiscal year. In this case, it would bring comparable revenue down to $30.40 billion. This was in spite of the fact that a couple of the firm’s operating channels saw weakness on a year-over-year basis. Author - SEC EDGAR Data The part of the company that suffered the most was the independent retailer channel. Revenue fell by 3.1% on a comparable basis, declining from $7.70 billion to $7.46 billion. Management did not actually provide much in the way of detail on this. But they did say that the company, as a whole, was impacted negatively by a decline in unit volumes that was offset by higher prices and new business with existing customers. The real driver of growth for the firm was the supernatural channel, with revenue shooting up from $6.37 billion to $6.81 billion. Even though the supernatural channel might sound spooky or peculiar, it actually consists of chain accounts that are national in scope. They also carry natural products for the most part. At the moment, this actually consists of a single customer for the business. This happens to be Whole Foods Market, which is currently owned by e-commerce giant Amazon (AMZN). Large customers can be scary because of their ability to significantly impact, in a negative way, a business by either pushing them for more attractive terms or leaving them entirely. But at the moment, Whole Foods Market is locked in as a customer until May 20th of 2032. While revenue improved during this time, the company went from generating a net profit of $24 million in 2023 to generating a net loss of $112 million in 2024. Other profitability metrics also took a hit. Adjusted net profits even took a hit, declining from $136 million to only $9 million. Operating cash flow fell from $624 million to $253 million. If we adjust for changes in working capital, we get a decline from $454 million to $248 million. And finally, EBITDA for the company declined from $640 million to $518 million. Financial results on the bottom line have been negatively impacted by a couple of things. For starters, operating costs grew by $127 million year over year. $78 million of this was because of the extra operating week that the business had. In terms of the margin side of things, the increase was driven in part by $49 million of higher incentive compensation costs, as well as certain transformation costs. Restructuring, acquisition, and integration expenses also managed to rise by $28 million year over year. And because of the high interest rate environment that we are in, net interest expense grew from $144 million to $162 million. As the first chart in this article shows, the last three fiscal years as a whole have not been particularly pleasant for the business. However, management seems optimistic about the future. For this year as a whole, revenue is expected to be between $30.3 billion and $30.8 billion. Even though the midpoint of this, $30.6 billion, would be lower than what the company achieved last year, after adjusting for the extra operating week, it would actually be up by 0.5%. The bottom line is still expected to struggle. However, management is forecasting a nice improvement compared to what was seen last year. The current expectation is for a net loss of between $3 million and $41 million. On an adjusted basis, we are looking at a profit of between $11.9 million and $47.6 million. Management also expects EBITDA to come in somewhere between $520 million and $580 million, with operating cash flow likely to be somewhere around $400 million. Author - SEC EDGAR Data If we look at the chart above, we can see how the stock is priced on a forward basis for 2025 and using the historical data from 2024. What we have here is a company that's trading in the low to mid-single digit range. This is always great to see, especially if, like me, you are a value investor. Compared to other similar businesses, shares are cheap as well. In the table below, you can see how the stock is priced compared to five similar enterprises. On a price to operating cash flow basis, it ended up being the cheapest of the group. But when it came to the EV to EBITDA approach, I found that two of the five companies ended up being cheaper than it was.   Company Price / Operating Cash Flow EV / EBITDA   United Natural Foods  5.0 6.4   Andersons (ANDE) 5.2 5.1   Performance Food Group Co (PFGC) 11.8 12.2   SpartanNash Co (SPTN) 5.3 5.9   US Foods Holding Corp (USFD) 14.9 13.6   Sysco Corp (SYY) 12.7 11.7   Click to enlarge How cheap shares are is certainly a big driver in why I am bullish about the business. But I also like to see that management is optimistic about the 2025 fiscal year. The good news is that we will soon get a look at how credible this optimism is. That's because, before the market opens on December 10th, management will be reporting results for the first quarter of 2025. Revenue, according to analysts, should come in at about $7.61 billion. If this turns out to be an accurate call, it would be approximately 0.8% above the $7.55 billion the company reported for the first quarter of 2024. Author - SEC EDGAR Data On the bottom line, improvements are expected as well. In the first quarter of last year, the company reported a loss per share of $0.67 and an adjusted loss per share of $0.04. This translates to a net loss of $39 million and an adjusted net loss of $2 million. Analysts currently believe that the loss per share will have contracted to approximately $0.22 while the adjusted loss should come in negative to the tune of $0.01. This would work out to a net loss of $13.1 million and to an adjusted net loss of $0.6 million. In the table above, you can also see historical results for the first quarter of 2024 when it comes to cash flows. We do not yet have any estimates when it comes to that. But I would wager that if we do see revenue increase and if we see profits improve, then these metrics will likely also do better year over year. Takeaway  From what I can tell, United Natural Foods strikes me as a very attractive value play. This does not mean that there aren't risks involved. The last three years have been tough for the company even as it has successfully increased revenue. Inflation has not been pleasant for the business or the industry. And because of inflation, volumes have contracted. Ultimately, the end result has been additional pain on the bottom line. But if what management says is true, the worst appears to be over. Add on top of this how cheap shares are relative to cash flow, that I cannot help but to be just bullish enough to keep the company rated a ‘buy’.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"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":"4.29.2","shortVersion":"4.29.2","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/2485341544"}