Why United Natural Foods (UNFI) Is Up 115% This Year

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The stock has gained over 18% today alone.

While by no means a household name, United Natural Foods, Inc. (NYSE: UNFI) has been posting a streak of stock market gains since the start of the COVID-19 pandemic a year ago. The company’s shares have blazed upward 115% since New Year’s Day 2021, and gained 445.97% over the past 12 months.

Today alone, following the release of its second-quarter (Q2) fiscal 2021 results, United Natural Foods’ stock has risen more than 18% in morning trading.

Investors clearly find something mouthwatering in this organic and natural wholesale food distributor. What’s United’s special sauce, and can it keep dishing it up into the future?

Why United Natural Foods Stock has Been Soaring

Source: Getty Images

Back in 2018, United Natural Foods was trading in the mid-$40 range, above where it stands today even after a robust year-long rebound. Its stock began sliding later that year as it completed its acquisition of Minnesota-based grocery distributor SuperValu, Inc., greatly increasing its debt in the process to pay the $3 billion acquisition price.

Amazon’s (NASDAQ: AMZN) acquisition of Whole Foods also contributed to the drop. After spending several years with its stock price below $10, United Natural started gaining again in March 2020 during the initial panic surrounding the U.S. COVID-19 outbreak.

Today, United Natural Foods is soaring after publishing its fiscal Q2 results. Revenue, or net sales, missed analyst consensus marginally according to Zacks Equity Research data, with the $6.89 billion in revenue falling short of the $6.91 billion forecast.

Though this is a 0.31% negative surprise, net sales still jumped 7.1% year over year. Adjusted earnings per share (EPS) clocked in at $1.25 EPS, 35.8% above expectations, skyrocketing 400% over last year’s Q4 figures.

While these results are solidly positive, United Natural’s 2021 guidance, and news about Whole Foods, are the strongest sources of the enthusiastic investor response reflected in today’s scorching stock market gains. The company’s updated whole-year fiscal 2021 guidance shows even  better results than fiscal 2020:

Metric Fiscal 2021 Outlook Midpoint Growth from Fiscal 2020
Revenue $27 billion to $27.8 billion 3.3%
Adjusted EPS $3.05 to $3.55 21.3%
Adjusted EBITDA $690 million to $730 million 5.5%

Additionally, United Natural Foods has inked an extension of its distribution deal with Amazon subsidiary Whole Foods Market that now continues through Sept. 27, 2027.

In a statement, Whole Foods supply chain VP Bart Beilman said “UNFI plays a key role in ensuring Whole Foods Market is able to meet the growing demand for high-quality products,” while United National Foods CEO Steven Spinner noted the “extension allows both companies to maintain focus on what is most important: continuing to meet the growing demand for healthy food at home,” The Street reports.

The distribution partnership is viewed as crucial not only by the company but by investors, part of the reason why United Natural Foods began losing stock value in 2017 after Amazon, rather than United Natural, acquired Whole Foods. Today’s description of the extension likely reassures many investors that United Natural’s potential for ongoing growth and profitability long-term.

Where UNFI Stock Might Go From Here

United Natural Foods’ year-long bull run continues to heat up with today’s vigorous Q2 results, upbeat guidance, and confirmation of six and a half more years of distribution partnership with Whole Foods. The distributor appears to be running more efficiently after several restructuring initiatives, too, with operating expenses dropping from 13.41% of net sales in Q2 fiscal 2020 to 12.59% in Q2 fiscal 2021.

Investors might ask, then, if United Natural Foods gains are permanent, or temporary and dependent on the COVID-19 now gradually receding before increasing vaccination numbers.

Turning to historical data, it appears United Natural might still have room to grow. Its $2.4 billion in debt, mostly generated by its SuperValu acquisition, is counterbalanced by its potential to raise up to $2 billion through asset sales, highlighted by multiple analysts.

With sales growing vigorously, the effects of the SuperValu deal being canceled out over time, and the critical “linchpin” partnership with Whole Foods now apparently rock-solid for more than half a decade into the future, some analysts are suggesting United Natural Foods could return to its former enterprise value to EBITDA multiples of stock valuation, which suggests a low-end level of $43 per share, a high end of $145 per share, and a middle case somewhere in the vicinity of $90.

Though not certain, United Natural’s rebound appears to be on firm footing and could result in a long-term return to a much higher share value in line with historic multiples.

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