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Can United Natural's (UNFI) Rally Continue Amid Headwinds?
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United Natural Foods Inc. (UNFI - Free Report) has been enjoying a bullish run so far this year. During this period, the stock has jumped 23.9%, compared with the Zacks categorized Food-Miscellaneous/Diversified industry’s growth of 7.8%. We believe there is room for further upside, which is also evident from its VGM score of "B" and long-term earnings growth rate of 6.8%.
However, estimate revisions tell a different story. Since this Providence, RI-based company reported weaker-than-expected first-quarter fiscal 2017 results, its estimates have been on a downhill ride. In fact, the Zacks Consensus Estimate for fiscal 2017 has dipped 0.8% over the past 30 days.
Factors Impacting the Company
On Dec 7, this specialty foods distributor reported lower-than-expected earnings and revenues for the first quarter of fiscal 2017. Adjusted earnings of 58 cents per share were also down 3.3% from the prior-year quarter figure of 60 cents, reflecting the impact of lower operating income margins. Net sales of $2.28 billion, however, climbed 9.7% from the year-ago quarter driven by acquisitions.
Gross margin expanded 20 basis points in the reported quarter. However, gross margin continued to be under pressure due to competitive pricing pressure, moderate supplier promotional activity, and a reduction in fuel surcharges. The company also faced modest deflation of 13 basis points in the quarter, which dealt a blow to categories such as produce, meat and cheese. In fact, this was the first quarter for United Natural to record a deflation in at least seven years. Adjusted operating margin also contracted due to higher operating costs related to acquisitions.
We note that the company is making efforts to build its store strategy and enhance the business through acquisitions. In the past 12 months, United Natural has acquired four exciting and uniquely positioned companies – Haddon House specialty foods, Global Organic, Nor-Cal and Gourmet Guru. With these acquisitions in its kitty, United Natural is now positioned as a large national provider of fresh produce, proteins, bakery, deli, specialty and natural products.
Though encouraged by increasing consumer demand for organic products, which is being driven by growing awareness of a healthy lifestyle, food safety and environmental sustainability, we can’t ignore the fact that the company has been struggling with continued margin weakness over the past few quarters. This is due to a shift in the customer mix to the lower-margin supermarket channel. In fact, the company’s recent acquisitions, despite being accretive to the top line, are exerting pressure on margins. Deflationary pressures are also hurting the produce and protein categories.
Nevertheless, we believe that these concerns will be short lived, leaving room for this Zacks Rank #3 (Hold) company to rebound over the long run and survive the ongoing challenges. Hence, we suggest investors to hold on to the stock for now as the rest is a wait-and-see story.
Sysco has an expected earnings growth rate of 8.8%. Further, it has delivered positive earnings surprises in all of the trailing four quarters, resulting in an average earnings surprise of 11.7%. Meanwhile, Lancaster Colony and Ingredion have an expected earnings growth rate of 3.% and 11.0%, respectively.
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Can United Natural's (UNFI) Rally Continue Amid Headwinds?
United Natural Foods Inc. (UNFI - Free Report) has been enjoying a bullish run so far this year. During this period, the stock has jumped 23.9%, compared with the Zacks categorized Food-Miscellaneous/Diversified industry’s growth of 7.8%. We believe there is room for further upside, which is also evident from its VGM score of "B" and long-term earnings growth rate of 6.8%.
However, estimate revisions tell a different story. Since this Providence, RI-based company reported weaker-than-expected first-quarter fiscal 2017 results, its estimates have been on a downhill ride. In fact, the Zacks Consensus Estimate for fiscal 2017 has dipped 0.8% over the past 30 days.
Factors Impacting the Company
On Dec 7, this specialty foods distributor reported lower-than-expected earnings and revenues for the first quarter of fiscal 2017. Adjusted earnings of 58 cents per share were also down 3.3% from the prior-year quarter figure of 60 cents, reflecting the impact of lower operating income margins. Net sales of $2.28 billion, however, climbed 9.7% from the year-ago quarter driven by acquisitions.
Gross margin expanded 20 basis points in the reported quarter. However, gross margin continued to be under pressure due to competitive pricing pressure, moderate supplier promotional activity, and a reduction in fuel surcharges. The company also faced modest deflation of 13 basis points in the quarter, which dealt a blow to categories such as produce, meat and cheese. In fact, this was the first quarter for United Natural to record a deflation in at least seven years. Adjusted operating margin also contracted due to higher operating costs related to acquisitions.
UTD NATURAL FDS Gross Margin (TTM)
UTD NATURAL FDS Gross Margin (TTM) | UTD NATURAL FDS Quote
We note that the company is making efforts to build its store strategy and enhance the business through acquisitions. In the past 12 months, United Natural has acquired four exciting and uniquely positioned companies – Haddon House specialty foods, Global Organic, Nor-Cal and Gourmet Guru. With these acquisitions in its kitty, United Natural is now positioned as a large national provider of fresh produce, proteins, bakery, deli, specialty and natural products.
Though encouraged by increasing consumer demand for organic products, which is being driven by growing awareness of a healthy lifestyle, food safety and environmental sustainability, we can’t ignore the fact that the company has been struggling with continued margin weakness over the past few quarters. This is due to a shift in the customer mix to the lower-margin supermarket channel. In fact, the company’s recent acquisitions, despite being accretive to the top line, are exerting pressure on margins. Deflationary pressures are also hurting the produce and protein categories.
Nevertheless, we believe that these concerns will be short lived, leaving room for this Zacks Rank #3 (Hold) company to rebound over the long run and survive the ongoing challenges. Hence, we suggest investors to hold on to the stock for now as the rest is a wait-and-see story.
Stocks to Consider
Some better-ranked stocks in the broader consumer staples sector include Sysco Corp. (SYY - Free Report) , Ingredion, Inc. (INGR - Free Report) and Lancaster Colony Corporation (LANC - Free Report) . All of them carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
Sysco has an expected earnings growth rate of 8.8%. Further, it has delivered positive earnings surprises in all of the trailing four quarters, resulting in an average earnings surprise of 11.7%. Meanwhile, Lancaster Colony and Ingredion have an expected earnings growth rate of 3.% and 11.0%, respectively.
Zacks' Top Investment Ideas for Long-Term Profit
How would you like to see our best recommendations to help you find today’s most promising long-term stocks? Starting now, you can look inside our portfolios featuring stocks under $10, income stocks, value investments and more. These picks, which have double and triple-digit profit potential, are rarely available to the public. But you can see them now. Click here >>