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Can United Natural's Growth Strategies Wipe Off Cost Woes?

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United Natural Foods, Inc. (UNFI - Free Report) has been in good shape lately, with a flourishing organic food business and growing presence in the e-commerce space. Moreover, the company’s well-chalked strategic targets for 2018 are expected to add greater sheen to its expanding business. However, higher freight costs and labor expenses have been acting as roadblocks in its performance.

That said, let’s closely inspect some of these factors impacting this renowned name in the natural and specialty food space.

Focus on E-commerce & Other Growth Initiatives Bodes Well

With sophisticated distribution networks and fulfillment centers, United Natural’s growth in the e-commerce arena is quite remarkable. Buoyed by such efforts, the company’s e-commerce sales jumped 23% in the third quarter of fiscal 2018, positively impacting the top line. Furthermore, United Natural remains committed to enhancing its presence in e-commerce space through investments in technology and infrastructure. In this regard, for the forthcoming quarters, management projects robust opportunities.

Apart from bolstering omnichannel presence, United Natural has laid out key targets for 2018, some of which drove fiscal third-quarter results. These targets mainly include plans to enhance customer base, expand the company’s broadline distribution channel, improve gross margin and retain focus on mergers and buyouts.

Speaking of buyouts, the company has been carrying out several acquisitions over the years to grow distribution network and customer base, and boost long-term growth. A few noteworthy buyouts of the company include Haddon House, Gourmet Guru and Nor-Cal Produce. Further, the company strives to develop effective sourcing processes and supply-chain networks to better align supplies with demand, thereby efficiently meeting consumer needs.

The solid focus on growth initiatives along with robust consumer demand across all sales channels, has been favoring United Natural’s top- and bottom-line performances for a while. During the fiscal third quarter, both top and bottom lines improved year over year and surpassed estimates. This marked the fifth and third consecutive quarter of earnings and sales beat for the company, respectively. Encouragingly, management expects the stellar performance to continue and it has raised fiscal 2018 outlook accordingly.


Can Efforts Offset Cost Related Hurdles?

Despite the aforementioned upsides, all doesn’t appear bright for United Natural. The company has been grappling with dismal gross margin rates for three straight quarters now, thanks to an unfavorable shift in consumer mix. Higher inbound freight costs have also been weighing on gross margin for some time.

Unfortunately, for the next two quarters, management expects higher freight costs to remain a hurdle. Apart from United Natural, other food companies such as Sysco (SYY - Free Report) , TreeHouse Foods (THS - Free Report) and J.M. Smucker (SJM - Free Report) have also been grappling with rising freight expenses lately. To further worsen matters, United Natural has been incurring higher labor expenses across several distribution centers due to the higher-than-anticipated demand. In fact, owing to the high demand, the company’s fill-rates have been deteriorating continuously for the past few quarters.

Notably, such downturns have eclipsed the company’s performance. In the past three months, the stock has declined 2.7% compared with the industry’s increase of 5.5%.

Nonetheless, we remain hopeful that the company’s strategic goals for 2018, especially, its e-commerce expansion efforts and plans to broaden distribution networks, will continue bolstering its performance. Moreover, this Zacks Rank #3 (Hold) company expects consistent growth in demand for its better-for-you products.

Marching ahead with such bold ambitions, we expect United Natural to easily combat the aforementioned hurdles and raise shareholders’ confidence in the stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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