United Natural Foods Faces Long-term Structural Challenges; Analyst Sees Competition, FCF Pressure, Labor Issues

BMO Capital Markets analyst Kelly Bania reiterated a Market Perform on United Natural Foods, Inc. UNFI, lowering the price target to $13 from $20.

UNFI reported fourth-quarter FY23 sales growth of 2% year-on-year to $7.417 billion, missing the analyst consensus of $7.47 billion. Gross margin for the quarter was 13% versus 14.5% last year. The gross profit fell 8.3% to $966 million.

Bania continues to see longer-term structural headwinds for UNFI, particularly as the grocery environment becomes more competitive and the company's investments in automation are likely to take many years and weigh on FCF.

While UNFI is investing in network automation, digital, technology infrastructure, and modernization of systems along with a refreshed board, CapEx is increasing to $400 million in F24E from $250 million in F22, pressuring FCF while margins are depressed, the analyst notes.

Significant inflation has supported strong trends during 2021-2022. Yet, longer-term structural pressures have resumed, including market share losses for UNFI's core independent customer base, gross margin mix-shift pressures, and meaningfully lower procurement gains, the analyst cautioned.

While some of the significant rebase risk may now be largely baked into the stock, Bania continues to question UNFI's internal visibility and see longer-term structural headwinds, including a challenging volume outlook for UNFI's key customer base.

The analyst also sees a risk that cross-selling wins were aided by supply chain disruptions, and management visibility remains low. 

Bania cuts the F24 adjusted EBITDA for UNFI to $474 million (from $560 million). Factors supporting this outlook include a lower GM% forecast of 13.4% (down from 13.5%).

The analyst's FY24 EBITDA margin rate is now a depressed 1.5% compared to a historical range of low to mid-2s post-SVU acquisition.

In addition, the analyst forecasts an underlying $120 million y/y labor rate headwind, assuming 3% underlying wage/OpEx growth, plus $62 million y/y in incentive comp headwinds (1.5% to OpEx). 

Price Action: UNFI shares are trading higher by 5.6% to $14.51 on the last check Wednesday.