On Jun 29, 2015, Zacks Investment Research downgraded United Natural Foods, Inc. UNFI to a Zacks Rank #4 (Sell) from Zacks Rank #3 (Hold), due to lower-than-expected third quarter fiscal 2015 results and a cut in fiscal guidance. Moderate sales growth and continued margin pressure hurt profits in the quarter.
Going by the Zacks model, companies holding a Zacks Rank #4 are likely to underperform in comparison to the broader market.
Why the Downgrade?
On Jun 8, United Natural reported third quarter of fiscal 2015, wherein it missed earnings and revenue estimates. It also lowered its guidance for fiscal 2015.
Earnings of 83 cents per share grew 13.7% year over year, helped by growth in sales and acquisitions. Sales increased 18.7% year over year on the back of higher demand for organic and natural food products and its acquisition of its Tony’s Fine Foods. Despite top-line growth, both gross and operating margins declined in the quarter.
The company’s gross margins have been declining over the last one year due to a change in the company’s sales mix. Generally, the grocery distribution industry is characterized by relatively high volume of sales with relatively low profit margins. Also, gross profits are higher on sales to independently owned retailers and lower on sales in the conventional supermarket and the supernatural channels. Also, higher inbound freight expense negatively impacts the overall gross margin. In addition, higher sales to Whole Foods Market, Inc. WFM are expected to generate lower gross profit percentages.
The company continues to expect net sales growth in the conventional supermarket and supernatural channels to continue to outpace growth in the independent and other channels in fiscal 2015, which would further dampen margins.
In addition, the recent dramatic drop in the value of the Canadian dollar is impacting the company’s operations as United Natural has a natural, organic and specialty distribution business in Canada. The company continues to expect negative currency impact to hinder profitability in 2015.
Nevertheless, United Natural, which is a national distributor of natural, organic and specialty foods, and related products, has been witnessing increasing demand for organic products as consumers are shifting toward a healthy lifestyle, food safety and environmental sustainability.
In addition, United Natural has taken the inorganic route to expand its distribution network, customer base and boost long-term growth. However, we cannot ignore the fact that these acquisitions carry lower margins, adding to the margin pressure.
The firms are also not so positive about the company’s numbers in the upcoming quarters. Estimates for fourth quarter fiscal 2015 declined 6.5% and that for fiscal year 2015 went down 2.4% over the last 30 days.
United Natural now carries a Zacks Rank #3 (Hold).
Stocks to Consider
Some better-ranked companies in the food industry include McCormick & Co., Inc. MKC and Post Holdings, Inc. POST. Both of them carry a Zacks Rank #2 (Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment