United Natural Foods Stock: Future Growth Drivers (NYSE:UNFI)

Investment Thesis

United Natural Foods, Inc (NYSE:UNFI) is a manufacturer and distributor of organic grocery and non-food products. The company has announced a significant change in the leadership of the company to accelerate the revenue and profit growth and penetrate the available market. The new leadership has integrated new technologies and operational processes, which can significantly increase the supply chain’s efficiency and give a competitive advantage to UNFI. I believe this integration can lead to revenue and profit growth in the coming years.

About United Natural Foods

The company produces and distributes organic grocery and non-food products and offers support services to retail shops in the USA and Canada. It reports revenue through two segments which are Wholesale and Retail. The wholesale business generates the most significant chunk of the revenue, which is 91% of the total sales, and the retail business contributes 9% of total revenue. It provides 300,000 products classified into six categories: grocery merchandise, nutritional supplements, perishables, frozen foods, bulk & food service products, and personal care items. The company operates through 57 distribution facilities and warehouses with 30 million square feet of space. For the last five years, the company has shown robust growth with a solid revenue growth rate of 23.79% CAGR and an EPS growth rate of 8.59% CAGR. It provides consumers in all fifty states and all ten Canadian provinces a coast-to-coast distribution service. The firm intends to develop new business opportunities with independent shops that run a variety of formats, local and national chains, and foreign clients with a wide range of requirements. The company has made significant leadership changes to get the maximum benefit of the current momentum in the business and penetrate the market to deeper levels.

New Leadership Structure

The company has recently announced a major change in its leadership to accelerate sales and profit growth and achieve its strategic goals. It has introduced new management and organizational structure to assist better its suppliers, consumers, the environment, and employees, which is significant as the company continues to assemble the workforce, capabilities, and technology essential to implement new strategies to pace the growth successfully. The company has improved its position in the industry with this new leadership to penetrate the $140 billion addressable market. The new leadership team will focus on Retail, Wholesale, Services, and Operation, Corporate & Business Transformation department. I think the services platform can be a prominent contributor to sales and profit growth as it is a significant value addition for the customers and suppliers. I believe the company can create a strong position in the industry with the services platform as it can help create a solid network of suppliers and end users with its marketing and professional services. These services educate the consumers and suppliers about the industry and help to create a marketing plan to grow their business which can create the company’s strong relations with stakeholders. As per my analysis of the food distribution industry, the company also needs an enhanced supply chain system to support strong relations and create a solid stakeholder network. The new management has installed new technology to enhance the company’s supply chain, significantly decreasing delivery time. I will explain that in detail in the next section of the article. After considering all these factors, I believe this new leadership can achieve maximum benefits from the current momentum in the business and huge potential growth in the market.

Efficient Supply Chain

The company has announced the integration of new technologies and operational processes to make the supply chain more efficient. After the integration, the delivery time has decreased by one day, which is a big positive for the company. With this, the company wants to offer fresher products to its consumers. By combining its procurement efforts and buying commodities directly from large Mexican suppliers, the firm revamped its produce sourcing approach to offer the freshest product to its clients. The product is then delivered straight from farms to UNFI distribution facilities using a cross-docking facility in McAllen, Texas.

Additionally, UNFI has put in place commodity-specific limits to hasten the flow of goods via its distribution hubs and retailers. The enhanced sourcing strategy and supply chain management procedures have enhanced inventory turnover, decreased inventory shrinkage, and, most significantly, allowed UNFI to cut its supply chain by an average of more than a day annually over the past year. The company is already experiencing more product sales growth than the overall industry, driven by the efficient supply chain. I believe the value-added services explained in the earlier section and the efficient supply chain system can give a competitive advantage to the UNFI in the coming years as it can help the company to create a solid and impenetrable network of consumers and suppliers. I also believe the company might attract customers in the coming period as with the shorter delivery period; it can provide fresher products compared to other industry players, which can increase revenue. An efficient supply chain can raise profitability by reducing logistics expenses and inventory turnover days in the coming years.

What is the main risk faced by UNFI?

Inflation

Generally, the grocery industry is a low-margin business with a higher sales volume. In such a business setup, there is little room to accommodate the increased cost due to higher labor and fuel costs. The recent inflation has put a lot of pressure on the company’s profit margin, but the company has overcome this risk by maintaining higher sales volumes. However, the further increase in the prices due to inflation could have a negative impact on UNFI.

Technical Analysis and Fundamental Valuation

UNFI has positive technical indicators reflecting a buying opportunity from current price levels. The stock is trading above its 50-day, and 100-day weighted moving average (WMA) and consistently sustaining over it, reflecting strength in the stock price and its momentum. The 50-day WMA has recently crossed the 100-day moving average level, which generally translates into a big upside in the stock price, which we might witness in the coming weeks. I believe UNFI has a WMA indicator in its favor. The RSI indicator suggests the stock has recently entered the buying territory below the 70 RSI band range. The stock tested the 70 RSI band range and then took resistance before dropping below the 70 RSI band level. I believe with the current strong momentum, the stock could soon test the 70-band level again and sustain above it this time, reflecting an upside swing in the stock price.

Integrating new technology and operational processes is expected to drive revenue and profitability growth as it has significantly enhanced the company’s supply chain. UNFI is trading at a P/E ratio of 10.60x, and the sector median is 20.33x, which reflects the company is undervalued as per the Relative P/E ratio model. With the FY22 EPS estimates of $4.80, the forward P/E comes out to be 9.68x. As compared to the sector median, the company is greatly undervalued, and with the strong financial growth drivers and potential competitive advantage, I believe UNFI will trade at a P/E multiple of 13x, and with FY22 EPS estimates of $4.80, we get a target price of $62, a 32% upside from the current price levels.

Conclusion

Integrating new technology and operational processes could give the company a competitive advantage and drive significant revenue and profitability growth. It has positive technical indicators reflecting a buying momentum in the stock. UNFI faces inflation risk, but it has managed that risk by maintaining higher sales volumes. I assign a buy rating for UNFI after considering a 32% upside from current price levels.