We are moving United Natural Foods (UNFI) to the Hedgeye Consumer Staples LONG bench.
HEDGEYE OPINION
We have ridden the wave on this name, going long at ~$49 (Black Book HERE) up to ~$55, and now down sharply to ~$37. We will be the first ones to admit that we did not time this trade correctly, misjudging the Whole Foods (WFM) effect, the overall natural and organic category going more mainstream, and the slowing center of store. At ~$49 UNFI was trading at 2008 recession levels, what we called a “generational opportunity,” at the time that was an accurate portrayal. Markets change, and we have to change with them. One may ask; why aren’t you moving it to the SHORT side? If it wasn’t a generational opportunity at $49, we definitely believe it is below $37, but we need to see a few things play out before gaining confidence in the long-term trajectory of UNFI.
- Fill newly added capacity
- Grow within current stores
- Win new contracts
- Acquire fresh food assets
UNFI is still a great company, with a solid management team. The market is changing around them; natural and organic is now mainstream and available in more locations besides just the natural channel (WFM) and the center of store is struggling as consumer reach for more fresh items. UNFI must learn to change with this market and we are confident they are working towards that. They still maintain one of the largest portfolios of natural and organic products and provide a differentiated, value-add service that their customers appreciate and need. Bottom line is that the TAIL story is still in tacked, but there will be some near term turbulence as we are seeing today.
1Q16 EARNINGS RESULTS
For all intents and purposes this was an ugly quarter, one that included a top and bottom line miss, with a full year 2016 guide down. Net sales for 1Q16 were $2.08 billion versus consensus estimates of $2.09 billion. Operating income decreased 7.7% YoY to $53.9 million, this also missed consensus expectations of $60.5 million, was heavily impacted by a $2.8 million restructuring charge related to the loss of the Albertsons contract. Adjusted diluted EPS for the quarter was $0.63, coming short of consensus estimates of $0.68 by $0.05.
MANAGEMENT GUIDANCE
Management appeared especially cautious on the call, as they called 2016 a transitional year for the company. They continuously pointed out the competitive nature of the industry, and the troubles with the center of store. Management appeared wary of top line growth as they reposition the business to appeal to current consumer trends of fresh, perimeter food items and ethnic gourmet.
Management guided the full year down, revenue is now expected to be in the range of $8.4 to $8.6 billion versus previously announced guidance of $8.5 to $8.7 billion. Earnings per diluted share are now expected to be $2.73 to $2.84 versus previously announced guidance of $2.80 to $2.93.
Please call or e-mail with any questions.
Howard Penney
Managing Director
Shayne Laidlaw
Analyst
