Premier food wholesaler United Naturals Foods Inc. (UNFI) offers natural, organic, specialty, produce, and conventional groceries in the United States and Canada. The stock has gained 37% over the past three months, driven by the company’s recent collaboration with RangeMe, the leading online platform that streamlines new product discovery and solar project developer Pine Gates Renewables.

UNFI’s shares have gained 31.9% over the past month and 202.4% year-to-date to close yesterday’s trading session at $48.3. Though the company could witness top-line growth through its strategic partnerships, its weak fundamentals might make its rally unsustainable, especially in a volatile market.

Here’s what could shape UNFI’s performance in the near term:

Strategic Partnerships

In August, UNFI expanded its partnership with RangeMe, the premier online platform facilitating new product discovery among over 200,000 suppliers and retailers. The strengthened relationship between the companies who have worked together for the past four years enhances retailers' and growing suppliers' capacity to handle purchase orders directly on UNFI's Easy Options platform via RangeMe.

In June, UNFI, in collaboration with the solar project developer, Pine Gates Renewables, and the U.S. Bank, started investing in Trent River Solar, a 108.5-megawatt solar facility located in Jones County, North Carolina. This investment is aimed at reducing carbon footprint to combat climate change in the years to come.

Weak Financials and Poor Profitability

UNFI’s revenue declined marginally year-over-year to $6.74 billion in its fiscal fourth quarter ended July 31, 2021. Its operating profit decreased 43.8% from the year-ago value to $45 million. The company’s net income declined 18.9% from the prior-year quarter to $43 million, while Its EPS decreased 22.5% year-over-year to $0.69 over this period.

Its trailing-12-month gross profit margin of 14.6% is 57.5% lower than the industry average of 34.4%. Also, its EBITDA margin, ROA, and net income margin are 80.9%, 57.4%, and 90% lower than the respective industry averages. Furthermore, UNFI’s asset turnover ratio of 3.6% is 324.9% lower than the industry average of 0.84%.

Mixed Growth

Analysts expect UNFI’s EPS to rise 4.6% from the same period last year to $4.06 in the current year. Also, Street expects UNFI’s revenues to grow 4% year-over-year to $28.03 billion in the fiscal year 2021. Moreover, the company’s revenue is expected to rise 2.3% year-over-year to $28.68 billion in fiscal 2022, while its EPS is expected to increase 1.5% from the same period last year to $4.12 next year. However, the consensus EPS estimate of $0.46 for the current quarter represents a 9.8% year-over-year decline. Furthermore, its EPS is expected to decline 9.6% from the year-ago value to $1.22 in the next quarter ending January 2022.

The company’s revenue and EBITDA have grown at CAGRs of 38.1% and 28.1%, respectively, over the past three years. Moreover, its total assets have increased at an annualized rate of 36.4% over the same period. However, UNFI’s net income and EPS have declined at CAGRs of 2.9% and 9.4%, respectively, over the past three years.

Discounted Valuation

In terms of non-GAAP forward P/E, the stock is currently trading at 11.89x, which is 36.7% lower than the industry average of 18.8x. Also, its forward EV/Sales multiple of 0.22x is 88.9% lower than the industry average of 1.96x. Moreover, UNFI’s forward Price/Book of 1.61x is 50.1% lower than the industry average of 3.22x.

POWR Ratings Reflect Uncertainty

UNFI has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. UNFI has a B grade for Value. The stock’s lower-than-industry valuation multiples are consistent with this grade.

The stock also has a C grade for Quality and Growth. The company’s mixed growth potential and poor profitability are in sync with these grades.

Of the 84 stocks in the C-rated Food Makers industry, UNFI is ranked #35.

Beyond what I’ve stated above, you can view UNFI ratings for Stability, Sentiment, and Momentum here.

Bottom Line

Despite being the largest publicly traded grocery distributor, UNFI’s profit margins are much lower than its peers. Moreover, the company’s poor financials and mixed growth prospects could lead to a pullback in the near term. Thus, we think investors should wait until UNFI’s fundamentals improve.

How Does United Naturals Foods Inc. (UNFI) Stack Up Against its Peers?

While UNFI has an overall C rating, one might want to consider looking at its industry peers, Sysco Corp. (SYY) and Lifeway Foods Inc. (LWAY), having an overall A (Strong Buy) rating.

UNFI shares were trading at $47.36 per share on Wednesday afternoon, down $0.94 (-1.95%). Year-to-date, UNFI has gained 196.56%, versus a 17.15% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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