United Natural Gains on Strong E-Commerce Amid Setbacks

United Natural Foods, Inc. UNFI demonstrates its resilience through strong dedication to digital innovation and improvements in its supply chain. The leading food provider is actively engaged in a comprehensive transformation journey centered around various strategic initiatives. However, UNFI is bearing the brunt of macroeconomic factors, including inflationary pressures.

Let's delve deeper.

Strength in E-commerce Business

United Natural's sales are being positively impacted by its strong presence in e-commerce, supported by expanded solutions offered across its Independents and Chains channels. These offerings include digital platforms tailored to meet customer needs. The company's value-added supplier program, UNFI Insights, has been a success. The launch of Community Marketplace, a digital B2B e-commerce solution aimed at emerging brands, further enhances distribution opportunities with customers.

Enhancing Supply-Chain

UNFI is actively enhancing its supply chain processes and management disciplines to drive growth. The company's efforts have led to significant reductions in shrinkage, contributing positively to both financial performance and operational efficiency. Notably, the improved wholesale margin in third-quarter fiscal 2024 reflects ongoing shrinkage improvements, approaching pre-COVID levels of approximately 30 basis points as a percentage of sales. It anticipates further opportunities to reduce shrinkage, thereby enhancing profitability while maintaining strong relationships with customers and suppliers.

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Transformation on Track

United Natural is actively engaged in a comprehensive transformation journey that involves several strategic elements. The company is advancing toward improving margins and enhancing cash flow generation through targeted efforts in four key areas — expanding and intensifying network optimization, reducing annual capital expenditures, optimizing cost structures and cutting net working capital.

As part of this initiative, management is implementing short-term value-creation projects expected to enhance operational efficiencies. Building on the progress achieved in the past year, the company aims to refine its expense structure further, aiming for efficiencies comparable to the $150 million already realized. This optimization effort includes a cohesive and strategic approach to customer and supplier engagements, alongside better alignment of corporate resources in accordance with the updated strategy.

It intends to allocate around $300 million towards capital expenditures in the fiscal 2025, focusing on maintenance, targeted network enhancements and technology upgrades. This strategy aims to optimize resource allocation, bolster the overall business and balance sheet and enhance capacity for strategic investments in higher-margin segments such as services.

Hurdles on the Way

United Natural has been witnessing a challenging industry backdrop in the past few quarters. Consumers are buying less to manage their budgets and shifting away from traditional grocery stores, possibly seeking more affordable options like discount stores, bulk buys or online shopping. Third-quarter fiscal 2024 net sales declined slightly, thanks to lower unit volumes.

UNFI is bearing the brunt of weakness in the Retail business, a trend that persisted in the fiscal third quarter. The company's retail business faced challenges due to significant price sensitivity among consumers in the retail markets. We note that factors like economic pressures, reduced government assistance, changing consumer behavior and increased competition are affecting consumer spending, which is a concern.

That being said, United Natural's emphasis on the benefits mentioned above is expected to continue driving its growth narrative. The Zacks Rank #3 (Hold) company's shares have increased 29.3% in the past three months against the industry's decline of 4%.

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