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Shares of United Natural Foods (UNFI) jumped upwards following the release of its fourth quarter results, which were accompanied by a strong outlook for the fiscal year of 2014. The strong revenue growth and continued margin expansion are necessary to support the current valuation at over 30 times earnings. While I continue to like the long term prospects, I remain on the sidelines for now.

Fourth Quarter Results

United Natural Foods generated fourth quarter revenues of $1.64 billion, up 22.2% on the year before. Adjusted for the fact that the quarter contained 14 weeks instead of 13, revenues were up by 13.4%.

Consensus estimates for fourth quarter revenues ranged from lows of $1.57 billion to highs of $1.63 billion.

Net earnings rose by 27.6% to $32.1 million, as earnings per share rose by a similar percentage towards $0.65 per share. Earnings comfortably beat consensus estimates of $0.60 per share.

CEO Steven Spinner commented on the strong performance, "UNFI crossed the $6 billion annual net sales mark, and most importantly demonstrated real progress across all of our core strategies resulting in over 18% net income growth compared to the prior year."

Looking Into The Results..

United Natural Foods saw healthy performance driven by a 13.4% increase in adjusted revenues. Gross margins rose by 11 basis points to 17.3% in the comparable period last year. Modest margin expansion was driven by purchasing and logistics efficiency, partially offset by a unfavorable mix by supplying to lower margin supermarkets.

Operating expenses fell by 11 basis points to 13.9% of total sales. Greater productivity and a reduction in operating expenses boosted revenues as well. As a result, operating income rose by 22 basis points to 3.4% of total sales. The margin expansion in combination with revenue growth has driven a 27.6% increase in earnings.

.. And The Remainder Of The Year

For the fiscal year of 2014, United Natural Foods sees revenues between $6.65 and $6.78 billion, up 9.7% to 11.8% on the past year.

Adjusted for the fact that 2013 had a 53rd week, sales are seen up 11.8% to 14.0%. GAAP earnings per shares are expected to increase by 10 to 15%, coming in between $2.40 and $2.50 per share.

The revenue outlook looks very solid, as consensus estimates for revenues stood at $6.61 billion. Note that consensus for full year earnings stood at $2.49 per share, the high end of the guided range.

Valuation

United Natural Foods ended the fiscal year of 2013 with $11.1 million in cash and equivalents. The company operates with $165.1 million in total debt, for a net debt position of around $154 million.

Full year revenues came in at $6.06 billion, up 15.8% on the year before. Net income rose by 18.1% to $107.9 million. Factoring in gains of 13% on Friday, with shares exchanging hands at $68 per share, the market values United Natural Foods at $3.34 billion. This values operations of the firm at 0.55 times annual revenues and 31 times annual earnings. United Natural Foods does not pay a dividend at the moment.

Some Historical Perspective

Long term holders have seen very decent returns, propelled by the share price performance over the past five years. Between 2004 and 2010, shares have traded in a $15-$35 trading range. From that moment in time, shares have steadily gained ground, currently exchanging hands at $69 per share. Between the fiscal year of 2009 and 2013, United Natural Foods has increased its annual revenues by a cumulative 70% to $6.1 billion. Net earnings rose by 83% to $108 million.

Investment Thesis

While there has been some uncertainty concerning where exactly consensus estimates should be, the feeling is that the company ended the year on a strong basis, and guides for a strong 2014. United Natural Foods itself speaks of a solid fourth quarter, in which growth accelerated. The company sees this demand acceleration continuing in the first 5 weeks of the new year, with sales growth North of 14.5%. As a result, United Foods faces more out-of-stock situations. The rapid growth and relative small size of its suppliers, combined with many seasonal products are to blame.

The long term prospects remain good as the natural organic industry is set to almost double by 2020, according to comments from executives in the conference call. United Natural Foods aims to further gain market share in this rapidly growing market by supplying both supernatural, supermarkets and independents.

The company aims to grow the business both organically and by means of new acquisitions. The company has traditionally relied on acquisitions to boost growth, and it has a good track-record in integrating them.

It has been a long time since I last took a look at United Natural Food's prospects. Back in June of 2012, I concluded that revenue multiples were fair and in line with the wider food industry. Yet shares were trading at premium earnings multiples.

The operating improvements, which boosted operating earnings, have materialized over the past year, and have pushed up shares by some 30% since I wrote the article to levels around $68 at the moment.

Trading at 31 times annual earnings, the solid revenue growth alone cannot justify the current valuation, as margin expansion should materialize to support the valuation. I remain optimistic about the long term prospects, but remain on the sidelines for now.

Source: United Natural Foods - Strong Performance, Great Potential And A Premium Valuation