Third Quarter Results
United Natural Foods reported strong third quarter results on Wednesday. Net sales increased 15.3% on the year to $1.39 billion. Net profits increased 24% to $29 million, or $0.59 per share. Gross margins fell 53 basis points to 17.6% as consumers continued to shift their purchases towards the supermarket channel. Operating margins increased 27 basis points to 3.5% as operating expenses fell 81 basis points amidst continuous initiatives to enhance productivity throughout the organization.
"Our results demonstrate UNFI's continued commitment to growing at a rate that exceeds the industry while delivering exemplary customer service to the organic and specialty foods retailer", according to CEO Spinner.
For the first nine months of the fiscal year of 2012 sales increased 15.5% to $3.89 billion. Operating margins came in at 2.9% for the period, compared to 3.0% last year. Diluted earnings per share rose 8% to $1.35, including a $0.09 restructuring charge.
On the back of the results the company expects annual revenues of $5.18-$5.22 billion, a slight increase from the company's previous guidance of $5.11-$5.17 billion. Diluted earnings per share are expected to come in between $1.84 and $1.88 per share.
United Natural Foods ended its third quarter of its fiscal year of 2012 with $14 million in cash and equivalents and $44 million in short and long term debt for a net debt position of $30 million. After today's rally the market values the company at some $2.5 billion. This values the firm at 0.6 times annual revenues and 32 times 2011s annual earnings. The valuation compares to a revenue multiple of 0.8 times for ConAgra Foods (NYSE:CAG) and 0.3 times for Archer Daniels Midland (NYSE:ADM). These competitors trade at 13 and 10 times annual earnings, respectively.
Currently the company does not pay any dividends.
Shares in United Natural Foods have been in a strong upwards trend in recent years. Trading as low as $14 in the beginning of 2009 shares have moved upwards to all time highs of $54 last month. The company has seen accelerating revenue growth in recent years and it expects revenue growth around 15% for the full year of 2012. Profits have grown in line with revenues as net margins have stabilized around 1.7%
The organic food industry has seen consistently higher growth compared to the general food industry. Consequently, shares in this segment have traded at premium valuations compared to their "traditional" competitors. Revenue multiples are roughly in line with the wider food industry, but the expected earnings multiple of 28 times for 2012 seems a bit on the rich side. Investors are however willing to pay a premium amidst the "thin" margins the company is reporting.
Continued efficiency measures and a lower focus on revenue growth can result in strong profit growth in the coming years.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.