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United Natural Foods Inc. Idea Proposal (UNFI)

United Natural Foods Inc. Idea Proposal (UNFI)
 

Can UNFI rebuild its margins amid competitive threats from organic and conventional distributors? Will Amazon take over UNFI’s distribution to Whole Foods?

Report Available: January 31, 2018

 

Blueshift’s initial research found UNFI coming off a strong quarter, boosted by sales to Whole Foods following the latter’s acquisition by AMZN. UNFI’s margins continue to suffer, however, as sales shift from the more profitable independent grocers to the bigger supermarket chains. UNFI faces significant risk if AMZN were to decide to take over distribution to Whole Foods.

 

Observations

  1. UNFI, the leading distributor of organic and specialty foods, surprised analysts this month with both its top-line and bottom-line performance in its fiscal Q1. Sales grew 7.9% year-over-year to $2.46 billion, while profits were up 4.4% to 60 cents per share. The results led company officials to increase sales and profit guidance for the full fiscal year, which ends July 28. Executives said demand for natural and organic foods remains strong.
  2. UNFI’s gross margins, however, continued to weaken in the most recent quarter, a trend that has plagued the company for several years. Margins declined 38 basis points compared to a year earlier, falling below 15%. The company blamed the decline on a shift in sales to less profitable channels, such as big supermarket chains like KR and AMS:AD.
  3. A major portion of UNFI’s strong Q1 performance was likely from increased sales to Whole Foods, the supermarket chain that represents about one-third of UNFI’s total sales. Whole Foods said its sales during the most recent quarter were up 4.4%, its biggest growth since the third quarter of 2015. The boost, however, may have been a short-term blip spurred by the publicity of AMZN closing its acquisition of Whole Foods during the quarter and cutting some prices. That acquisition also represents a potential threat for UNFI: AMZN, with its expertise in logistics, could take over distribution to Whole Foods and displace UNFI.
  4. UNFI has been on a buying spree, with four significant acquisitions over the past 18 months, as it tries to increase its focus on fresh foods over non-perishable items. That effort has also included new investments in cold storage facilities and new distribution centers.

 

Is UNFI’s recent bump in sales to Whole Foods sustainable? Will AMZN take over distribution for Whole Foods and cut UNFI out of the picture? Are independent grocers negotiating more favorable pricing and payment terms with UNFI? Are UNFI’s margins being hurt by conventional supermarkets taking share of natural and organic food sales from independent and specialty stores? To answer these and other questions, Blueshift will gather data and issue a market research report from independent sources in the following areas: Independent grocers, Conventional supermarkets, Competing distributors, and Industry specialists.

 

Companies: United Natural Foods Inc. (UNFI), Ahold Delhaize NV (AMS:AD), Amazon.com Inc. (AMZN), Kroger Co. (KR), SuperValu Inc. (SVU)

 

Research Begins: January 15, 2018