We’re bullish on Whole Foods Market (WFM). We really don’t like United Natural Foods (UNFI).
The two calls are intimately related.
Whole Foods is, of course, the $9 billion upscale supermarket chain that helped popularize the healthful, everyday consumption of organic foods across the country. United Natural Foods is their supplier, a distributor of organic products.
A transformation is happening at Whole Foods that will directly hurt the $2.2 billion food wholesaler. Whole Foods founder and CEO John Mackey is now personally overseeing a turnaround that’s been a long time coming. After settling lawsuits related to the mislabeling of “all natural” products, the company is refocusing itself.
Mackey’s plan includes slowing the growth of Whole Foods locations and could ultimately cut deadweight stores entirely. Mackey hinted as much in a recent earnings conference call:
“We believe our targeted and disciplined site selection, and continued moderation in ending square footage growth will result in a healthier bottom line, increased free cash flow, and higher returns as we minimize the negative impact from cannibalization, and redirect our energy and capital on improving comps, EBITDA, and ROI.”
With Whole Foods pulling back, United Natural Foods loses the momentum of a key customer. Whole Foods accounted for approximately 33% and 34% of the distribution company’s total net sales for the first quarter of fiscal 2017 and 2016.
“We do not believe investors fully grasp the realities of slowing square footage growth at UNFI’s biggest customer,” says Consumer Staples analyst Shayne Laidlaw. If we’re right, they’ll learn soon enough.
Bottom line?
Buy Whole Foods. Sell United Natural Foods.
