UNFI | LOVE THE LONG THESIS

United Natural Foods (UNFI) is on our Hedgeye Consumer Staples Best Ideas list as a LONG.

 

We recently presented a Black Book on our UNFI LONG thesis (click HERE for replay). We believe in the strong growth prospects that this company has and that the risks to the business have been overblown.

 

UNFI | LOVE THE LONG THESIS  - CHART 1

 

FOURTH QUARTER 2015 RESULTS & 2016 OUTLOOK

There were no surprises in this announcement as everything came in in-line with the numbers that were preannounced a few weeks ago. Although, notably there was a CFO change, as Mark Shamber will be leaving the company, to be replaced by Mike Zechmeister General Mills’ Yoplait Division Finance Officer. Revenue for the quarter was $2.06bn matching consensus estimates of $2.06bn. UNFI reported 4Q15 EPS of $0.72 also matching consensus estimates of $0.72.

 

Notably, gross margin for 4Q15 was down 109bps YoY to 15.3%. The decrease was primarily attributable to the dilution from Tony’s, the declining value of the Canadian dollar, lower fuel surcharges and a shift in mix of sales. The company will be lapping the effect of the Canadian dollar during 2Q16 around the November or December timeframe.

 

We are looking at fiscal 2015 as a rebuilding year for UNFI, as they invested in growing their infrastructure, fully integrated the Tony’s business and lost a big contract with Albertsons. We believe that their newly built capacity in shelf-stable and perishable, will afford them the ability to go out and obtain large accounts across the country.

 

The outlook for 2016 is just confirmation of the previously announced guidance, estimated sales in the range of $8.51 to $8.67, an increase of about 4% to 6%. Adjusted earnings per diluted share for fiscal year 2016 are expected to be in the range of $2.86 to $2.98, an increase of 0.4% to 4.6%.

 

GROWTH ― ORGANIC AND M&A

UNFI saw strong organic growth in 4Q15, Supernatural (Whole Foods Market) organic sales increased by 10%, Supermarket organic sales grew 2.6%, Independent channel grew 3.6% organically, lastly, Foodservice sales were up 23.7% organically, showing that this small business could prove as a strong growth opportunity for the company.

 

Management spoke to their robust distribution system that they have invested in over the last five years. They are prepared to fill this capacity with new customers, and to grow relationships with current customers.

 

The success of this company is dependent on organic growth but equally as important is growth through M&A. This is a hot topic on calls, analysts often asking: What are you looking at? How are valuations looking? UNFI management talks more openly about M&A than most companies. When asked about the size of a potential M&A deal and a playbook for success, on this call Steve Spinner (CEO) responded simply with “go large.” The larger companies have infrastructure and processes already in place making them much easier to acquire than smaller companies.

 

From the way Steve was talking about current M&A discussions they are having, we get the feeling that they are weeks away from announcing something. We know given their history that they are very smart with their cash and will stay within their guidelines when acquiring a company. And potential sellers know this because they have been so firm in the past, if owners want to sell, UNFI is the only game in town to sell to.

 

MANAGEMENT CHANGE

Whether Mark Shamber’s exit was a forced one or a personal decision doesn’t really matter to us. Mike Zechmeister is a great choice to fill in this role and a big win for UNFI. His resume from General Mills speaks for itself, working across the company in all major roles over the last 25 years, from Sales, Treasury, VP Finance Pillsbury and most recently the VP Finance in the Yoplait Division. Finance has a big voice at the table at General Mills and he led the charge to return the Yoplait division back to growth.  

 

I (Shayne Laidlaw) worked with Mike personally during my first year at General Mills and I can’t say enough about what a great leader he is. He is one of the smartest people you will find in not only finance but at the entire company, he leads with a no nonsense mindset which drove strong results at GIS. Mike will be able to bring his widespread experience from GIS and arguably a higher level of experience to the CFO role at UNFI.

 

Besides the obvious on his resume, Mike brings the process knowledge that General Mills instills in all its leadership. He has strong experience in refrigerated production and distribution, as well as experience with Holistic Margin Management (HMM), GIS’s cost savings initiative, which he can help bring to UNFI.

 

From a personal decision stand point I have not spoken with Mike yet but he is not a person that would take a role with a sinking company. He obviously sees potential in the business going forward, and I would definitely trust his judgement.

 

HEDGEYE OPINION

This story is still unfolding but everything seems to be headed down the right path. We strongly believe in UNFI’s ability to grow sales organically, and M&A will supplement this growth along the way. We believe current valuations are a generational opportunity to buy this stock, as risks to the business have been far overblown.

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


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