Whole Foods Supplier United Natural Food's Q2 Print Leaves Bear Analysts Unmoved

Natural, organic and specialty food distributor United Natural Foods Inc UNFI reported Tuesday with fiscal second-quarter results that arrived better than expected on the top and bottom lines, but two Street analysts continue to hold a bearish stance on the stock.

The Analysts

Morgan Stanley's Vincent Sinisi maintains an Underweight rating on United Natural Foods' stock with a $9 price target.

Bank of America Merrill Lynch's Marisa Sullivan maintains at Underperform with a $13 price objective. 

Morgan Stanley: Fundamental Challenges Remain

United Natural's second quarter shows that ongoing challenges remain, Sinisi said in a Wednesday note.

The Supervalu business which the company acquired in 2018, performed worse than expected in the quarter, with wholesale results falling below expectations due to higher expenses. The core United Natural business was soft across every segment except for Whole Foods due to a challenging retail macro environment, the analyst said. 

United Natural's management suggested that accelerated store closures and a slowdown in new store growth among its clients are cyclical in nature, Sinisi said. Yet it's is more likely a symptom of structural challenges within the food retail space, he said. 

Should these headwinds continue, there is a risk to the company's fiscal 2022 financial targets, including $875 to $925 million in EBITDA, according to Morgan Stanley. 

BofA: Multiple Pressures

United Natural faces multiple pressures across different categories, Sullivan said in a Tuesday note:

• A soft end market.
• The absence of any vendor promotional dollars.
• Margin pressures from an unfavorable mix shift.
• Higher-than-usual expenses.
• Near-term profit problems from retail operations.

"Significant" integration risks, as Supervalu offers minimal customer overlap and a "different and complex" operating model.

United Natural's high financial leverage coupled with expectations for higher near-term capital expenditures poses another risk, Sullivan said. The company could mitigate some of its risks by selling assets or making use of potential tax elections from the Supervalu acquisition, she said. 

The research firm's $13 price target is based on six times estimated fiscal 2020 adjusted EBITDA of $597 million, which represents a move lower from seven times multiple on estimated EBITDA of $689 million. BofA's downward revision to EBITDA estimates and expectations for growth moving forward imply minimal potential for notable multiple expansion.

Price Action

United Natural Foods shares were down 5.33 percent at $14.21 at the time of publication Wednesday. 

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