Analyst Meredith Adler believes that United Natural Foods is “moving in the right direction by trying to grow the fresh side of its business, but predicting how and when that will happen is difficult.”
Adler also believes that the company has the needed capacity across its newer distribution centers for fresh products. However, constraints in buying and handling these products make the economics unattractive, unless a big customer is won in each market.
Additional Negatives
In addition, United Natural Foods has a pipeline of acquisition, although Adler believes that most of these acquisitions would be small and not have a significant impact on sales in 2016.
Growth in the company’s core business was slower than expected in 1Q16, which management has attributed primarily to “a fragmentation in the retail base for natural/organic products and the fact that it does not supply all of these retailers.”
Gross margin also continued to narrow during 1Q16, following a 110 bp decline in FY15, driven by a shift in both product and customer mix. The EPS for the quarter was below the consensus and the estimates
“Unfortunately, the environment for distributors has also become more competitive, and despite UNFI’s competitive advantages in service and product offering, it has to compete on price,” Adler added.
The EPS estimates for FY16 and FY17 have been lowered from $2.90 to $2.81 and from $3.33 to $2.93, respectively.
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