United Natural Foods, Inc. has been in the red zone for quite sometime now. The company has been facing capacity constraints, which in turn is continuously hurting its supply-chain network. Also, its gross margin is strained with unfavorable consumer mix and higher inbound freight costs. All these weighed upon the company’s first-quarter fiscal 2019 results, wherein the bottom line not only missed the Zacks Consensus Estimate but also declined on a year-over-year basis.

Consequently, the Zacks Consensus Estimate has been witnessing a downtrend over the past 30 days. We note that estimates for fiscal 2019 and fiscal 2020 have moved south by 65 cents and 47 cents to $2.08 and $2.58, respectively.

In the past three months, this Zacks Rank #5 (Strong Sell) stock has crashed approximately 60%, wider than the industry’s decline of 11.8%. Let’s delve deeper to find out what’s ailing United Natural.

Factors Affecting United Natural’s Performance 

United Natural is grappling with soft gross margin for a while due to sales from lower margin customers, which has been growing at an increased rate than other customers. Also, higher inbound freight costs have been a hindrance for some time. Rising fuel costs are a major reason for increased freight expenses. Some other companies like Conagra Brands, TreeHouse Foods, and Campbell Soup among others are also bearing the brunt of escalated costs.

Coming back to United Natural, higher demand has been creating immense pressure upon the company’s supply chain. Notably, suppliers have been unable to completely meet the company’s demand, which is weighing on its overall performance. Although United Naturals is focused on enhancing supply chain networks to better align supplies with demand, we are yet to see the outcome of these efforts. The company has also been incurring higher labor expenses across several distribution centers due to the higher-than-anticipated demand.

Moreover, the grocery industry is currently facing challenges like stiff competition, tight margins and aggressive promotional environment. Traditional grocery companies are facing competition from rival companies, which are strengthening their franchises through acquisitions and offering alternative outlets for food and other staples. Also, customers are becoming more inclined toward private-label products as they are low-cost alternatives to national brands. Such industry-wide headwinds raise concerns.

Nevertheless, United Natural’s well-chalked acquisitions have been enriching the company’s portfolio and remain a tailwind to the top line. In this respect, management expects significant gains from the buyout of SUPERVALU in the forthcoming periods.

We believe that such efforts will take time to yield results and win back investors’ confidence.

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