Sunday, April 02, 2006

United Natural Foods Inc (UNFI) Analysis

United Natural Foods Inc (UNFI) is a distributor of natural and organic food in the United States. UNFI serves more than 20,000 customers including Whole Foods Market in the United States.

First an overview of the natural foods industry. UNFI 10-K describes the natural foods industry as follows:

Natural Products Industry
Although most natural products are food products, including organic foods, the natural products industry encompasses a number of other categories, including nutritional, herbal and sports supplements, toiletries and personal care items, naturally-based cosmetics, natural/homeopathic medicines, pet products and cleaning agents. According to the June 2005 issue of The Natural Foods Merchandiser, sales revenues for all types of natural products rose to $45.8 billion in 2004, an increase of approximately 6.9% over 2003. This increase in sales was driven primarily by growth in the following categories:
· packaged grocery and fresh produce;
· frozen and refrigerated meats, poultry and seafood;
· bread and baked goods;
· personal care products; and
· dairy products.
The fastest growing categories in natural and organic products were personal care products, fresh meat and seafood, baked goods and pet products.
According to The Natural Foods Merchandiser, the continuing growth trend is driven by consumer desire for healthy, tasty and low-cost prepared food. More than half of American households represent “mid-level” organic customers, that is, they regularly purchase organic and natural products and want to learn more about nutrition as concerns continue to mount about health claims, food safety, irradiation and genetically modified organisms’ issues.


UNFI is a national chain and being a national chain provides it some advantages. It helps it integrate the administrative function and also enables it to get better deals as it is able to use its size to its advantage. In addition, it is also able to achieve savings through reduction of overlap in geographic regions.

UNFI has a solid expasnsion plan that includes expanding the customer base, expand into other channels of distribution and expand the UNFI brand. UNFI carries more than 40,000 natural and high quality products which are independently tested for its authenticity by third parties.

Let us look at the UNFI customer base and its balance sheets. Whole Foods Market represents 26% of UNFI sales. UNFI has an agreement with Whole Foods through 2007. Renegotiating this contract will be critical for the continued growth of UNFI. Given the large size of a single contract, Whole Foods is likely to have an upper hand in the negotiations. The sales mix of UNFI is worth noting. The sales to super market chains increased 4% in 2005 from 2004. Similarly distribution to independently owned natural product retailers declined by 5%. This point is worth noting only to underscore the importance of Whole Foods as a customer to UNFI. We will also see the impact of this to the balance sheet shortly.

The gross profit percentage declined in 2005 from 2004. It declined in 2004 from 2003. The gross profit percentage in each of the years is as follows: 20.3% in 2003, 19.8% in 2004 and 19.2% in 2005 respectively. One can expect to see decline in the operating profit margin if the supermarket sales continue to climb as the current trend shows. At the same time, the company has achieved efficiencies by decreasing the total operating expenses. The total operating expenses declined from 17.3% in 2003 to 15.7% in 2005.

The stock holders equity increased by 27% in 2005 from 2004. Cash flow from operating activities increased by 29% year over year. The proforma diluted earnings per share increased 12% in 2005 from 2004. The stock dilution in 2005 compared to 2004 was 1.5% which is very reasonable.

The company is expected to grow in the 18-25% range in the next couple of years. The risks to the stock are decline in margins because of a re-negotiation of the contract with Whole Foods in 2007. The company states that negotiation of a contract with Wild Oats caused the decline in margins in 2006. The company is well managed and run. The median analyst estimate for the company's stock is $37=00 in a years time. It is fully priced at its current levels. Should the stock dip, it should provide a good buying opportunity.

1 comment:

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