Why United Natural Foods Looks Healthy?

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Since the formation of its predecessor in 1976, this natural and organic food distributor has grown its business both organically and through acquisitions which have expanded its distribution network, product selection and customer base. Since fiscal 2004, its net sales have increased at a compounded annual growth rate or CAGR of 15.1%.

Highlights

* Sustained Financial Strength * Strategic M & A * Strategic New Customer Wins * Strong Balance Sheet * Growing To Over $10 Bln By 2017

The Stock In Focus

United Natural Foods Inc. (UNFI) is an independent national distributor of natural, organic and specialty foods and related products including nutritional supplements, personal care items and organic produce, in the United States and Canada, serving more than 40,000 customer locations.

Its thirty-two distribution centers, representing about 7.2 million square feet of warehouse space, provide the company with the largest capacity of any North American-based distributor in the natural, organic and specialty products industry.

The company offers more than 80,000 high-quality natural, organic and specialty foods and non-food products, consisting of national, regional and private label brands grouped into six product categories: grocery and general merchandise, produce, perishables and frozen foods, nutritional supplements and sports nutrition, bulk and foodservice products and personal care items.

Operating Structure

The company operates in three principal divisions.

Wholesale Division - includes broadline natural, organic and specialty distribution business in the United States, UNFI Canada, which is the company's natural, organic and specialty distribution business in Canada; Tony's, a leading distributor of a wide array of specialty protein, cheese, deli, food service and bakery goods, principally throughout the Western United States; Albert's Organics Inc., a leading distributor within the United States of organically grown produce and non-produce perishable items; and Select Nutrition, which distributes vitamins, minerals and supplements.

Retail Division - consists of Earth Origins, which operates the company's twelve natural products retail stores within the United States; and

Manufacturing Division - encompasses Woodstock Farms Manufacturing, which specializes in the international importation, roasting, packaging and distribution of nuts, dried fruit, seeds, trail mixes, granola, natural and organic snack items and confections, and Blue Marble Brands product lines.

Customers Concentration

Whole Foods Market is the company's only customer that represented more than 10% of total net sales in fiscal 2014, and accounted for about 36% of its net sales.

Carrying more than 65,000 SKUs, the Company supplies to over 27,000 customer locations across the US and Canada, and services a wide variety of retail formats including conventional supermarket chains, natural product superstores, independent retail operators and the food service channel.

In addition to the distribution services, United Natural Foods provide a range of innovative, value-added services for its customers and suppliers, to foster mutual success and growth. Its services include marketing and promotional tools, merchandising, category management and store support services.

At the core of UNFI's distribution operation are six main units: UNFI, UNFI Canada, Trudeau Distributing Company, Tony's Fine Foods, Albert's Organics and Select Nutrition, including Honest Green.

In the recent years, the company's sales to existing and new customers has increased through the continued growth of the natural products industry in general, increased market share through its high quality service and a broader product selection, the acquisition of or merger with natural products distributors, the expansion of its existing distribution centers and the construction of new distribution centers and the development of its own line of natural and organic branded products fosters growth in sales to existing and new customers.

Through these efforts, the company believes that it has been able to broaden its geographic penetration, expand customer base, enhance and diversify product selections and increase its market share.

Strategic M & A

The company has grown its business organically and through the acquisition of a number of distributors and suppliers, which has expanded its distribution network, product selection and customer base.

Since fiscal 2000, United Natural Foods has completed fifteen acquisitions of distributors, manufacturers and suppliers, the most recent being the acquisition of Tony's in the fourth quarter of fiscal 2014, two acquisitions of natural products retail stores and eleven acquisitions of branded product lines as of August 2, 2014.

United Natural Foods acquired Albert's, UNFI Canada, Earth Origins, Woodstock Farms Manufacturing, Tony's and specialty businesses.

The company has been the primary distributor to Whole Foods Market for more than sixteen years. Under the terms of the agreement with Whole Foods Market, UNFI serves as the primary distributor to Whole Foods Market in all of its regions in the United States. Its agreement with Whole Foods Market expires on September 25, 2020.

In July 2014, United Natural Foods completed the acquisition of all of the outstanding capital stock of Tony's, through its wholly-owned subsidiary UNFI West Inc., for consideration of about $206.2 million. With the completion of the transaction, Tony's is now a wholly-owned subsidiary and continues to operate as Tony's Fine Foods.

The company believes that the acquisition of Tony's accomplished certain of its strategic objectives as Tony's provides it with an immediate platform for expanding both its high-growth perishable product offerings and distribution footprint in the Western Region of the United States.

The company purchases its products from more than 6,000 suppliers. The majority of the suppliers are based in the United States and Canada, but it also source products from suppliers throughout Europe, Asia, Central America, South America, Africa and Australia.

On September 26, 2013, the company acquired all of the equity interests of Trudeau Foods LLC from Trudeau Holdings LLC, a portfolio company of Arbor Investments II LP for total cash consideration of $23.0 million.

Trudeau Foods is the largest Minnesota-based distributor of natural, organic and specialty food products and serves over 600 customer locations, including chain and independent grocers, wholesalers and meat markets in Minnesota, North Dakota, Wisconsin and Michigan's Upper Peninsula.

Though the company has exclusive distribution arrangements and vendor support programs with several suppliers, none of its suppliers account for more than 10% of total purchases in fiscal 2014.

The company's largest supplier, Hain Celestial Group Inc., accounted for about 5% of its total purchases in fiscal 2014.

Sales & Earnings Doubled Since 2009

Annual sales totaled $6.79 billion in fiscal 2014, higher than the $6.06 billion generated in fiscal 2013, $5.24 billion in 2012, $4.53 billion in 2011, $3.76 billion in 2010, and $3.45 billion in fiscal 2009.

Net income rose to $125.5 million or $2.53 per share in fiscal 2014, from $107.9 million or $2.19 per share in 2013, $91.3 million or $1.87 per share in 2012, $76.7 million or $1.62 per share in 2011, $68.3 million or $1.58 per share in 2010, and $59.2 million or $1.38 per share in 2009.

Backs FY15 Guidance

For fiscal 2015, United Natural Foods reaffirmed its outlook for reported earnings of $2.88 - $3.01 per share, an increase of about 14.3% - 19.4% over fiscal 2014.

Net sales are still projected to range between $8.13 billion and $8.38 billion, up 19.7% - 23.7% over 2014.

Analysts polled by Thomson Reuters are looking for earnings of $2.94 per share on revenues of $8.28 billion for the year.

FY15 Guidance Components

The company's existing UNFI Business is expected to generate fiscal 2015 sales of $7.36 billion - $7.57 billion, up 9.1% - 12.2%, and earnings between $2.76 and $2.88 per share, an increase of 9.5% - 14.3%, from the previous year.

Fiscal 2015 sales from Tony's Fine Foods is projected to range between $725 million and $830 million, an increase of 10.7% - 12.2%, and earnings are expected to be in the range of $0.09 - $0.17 per share, up 3.7% - 6.9% over last year.

Positioned for Continued Long-Term Growth

Annual sales between fiscal 2015 and fiscal 2017 is expected to grow by 10% - 14%, with CapEx/Revenue growth forecast to range between 1.1% and 1.4%.

Latest Q1 Performance

United Natural Foods Inc. (UNFI) reported a 19% increase in its first-quarter profit, reflecting a double-digit revenue growth and robust acquisitions. Both earnings per share and sales beat analysts' estimates.

* Q1 net income was $33.04 million or $0.66/Shr versus $27.76 million or $0.56/Shr last year-ago; Consensus - $0.63/Shr.

* Q1 Net sales rose 24% to $1.99 billion from $1.60 billion prior year; Consensus - $1.96 billion.

Results included incremental sales of about $227.7 million resulting from the company's acquisition of Tony's Fine Foods and Trudeau Foods (acquired during the first quarter of fiscal 2014).

However, gross margin declined 92 basis points to 16.0% from last year, negatively impacted by the dilution from Tony's sales in the quarter. Shifting customer mix, inbound freight costs and foreign exchange from the declining value of the Canadian dollar on the company's Canadian business also contributed to the year-over-year decline.

Operating margin dropped 7 basis points to 2.9% from last year.

Steven Spinner, President and Chief Executive Officer of United Natural Foods said, "UNFI achieved record sales of almost $2 billion during our first quarter of fiscal 2015 and comparable sales growth recovered nicely after experiencing a modest slowdown during the first few weeks of the quarter."

Summary

The company believes that the natural, organic and specialty market will provide fertile ground for significant internal growth and selected acquisitions.