Cheaper Than Its Big Customer, Whole Foods, United Natural Foods Offers Own Growth Story

Stock buyers who wanted the pop of Whole Foods Market (WFM) without the high share price found it late last year in United Natural Foods (UNFI), Whole Foods’ primary natural grocery distributor. United Natural investors paid comparatively small valuations for those shares and got slightly better returns than holders of the famously enriching Whole Foods shares, as seen in a stock chart.

UNFI Chart

UNFI data by YCharts

Perhaps it’s not too late to join in. United Natural’s share valuations haven’t changed much in the past year. It still trades at a PE ratio of about 27 and a price sales ratio of less than 0.5, both of which are on the high end of its sector averages. Whole Foods share valuations, which are always high due to its stellar returns record, rose a bit in the past year. Moreover, few dispute that there’s growing demand for the organic and specialty foods United Natural supplies.

United Natural got 36% of its net sales last fiscal year from Whole Foods, and it has contracts to continue as Whole Foods’ primary distributor through September 2020. But the company also is adding more grocer clients, and last year signed up Safeway (SWY). Overall revenues grew about 15% in the latest fiscal year, and analysts forecast about that level of growth next year too. Whole Foods attracts similar revenue forecasts.

One worry about United Natural is its ability to maintain profit margins, which has been a problem recently. Gross profit margins got squeezed in the past quarter largely because its own suppliers ran short on stock. Rather than disappoint customers, United Natural picked up product from other parts of the country and transported it at its own expense.

UNFI Gross Profit Margin Quarterly Chart

UNFI Gross Profit Margin Quarterly data by YCharts

United Natural’s management promised “a fair amount of confidence” that this is not an ongoing problem. Operating profit margins have been improving.

More problematic, however, is a shifting customer base toward more non-specialty stores. Traditional grocers like Safeway aren’t likely to pay the premiums Whole Foods does for United Natural’s products because their own margins are very thin. You can see this by comparing them to Whole Foods, a specialty grocer with much bigger mark-up on its products.

SWY Gross Profit Margin TTM Chart

SWY Gross Profit Margin TTM data by YCharts

Investors learned just a few days ago that United Foods will move into the S&P’s Midcap 400, a status which will probably help the shares attract interest. Generally though, bullishness for United Natural comes from belief that its products will be in higher demand going forward. Whole Foods is expected to have a good year – some 8% same store sales growth – as consumer pocketbooks grow along with an appetite for healthy eating. That trend would help Whole Foods’ competitors, as well as other potential United Natural customers, like stores specializing in gourmet or ethnic foods.

Whatever the trends are in appetites, United Natural and Whole Foods will delight or suffer them together. United Foods is just the cheaper way to tag along.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com.

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