United Natural (UNFI) Gains on Strong E-Commerce Amid Setbacks – July 12, 2024

United Natural Foods, Inc. (Unidentified – Free Report) demonstrates its resilience through a strong commitment to digital innovation and supply chain improvements. The leading food supplier is actively engaged in a comprehensive transformation journey centered around various strategic initiatives. However, UNFI is bearing the brunt of macroeconomic factors, including inflationary pressures.

Let’s take a closer look at this.

Power in e-commerce business

United Natural’s sales are supported by a strong e-commerce presence, supported by expanded solutions offered in the Independents and Chains channels. These offerings include digital platforms tailored to customer needs. The company’s value-added supplier program, UNFI Insights, has proven successful. The introduction of the Community Marketplace, a digital B2B e-commerce solution aimed at emerging brands, further expands distribution opportunities with customers.

Improving the supply chain

UNFI is actively improving its supply chain processes and management disciplines to drive growth. The company’s efforts have led to significant loss reduction, which has positively impacted both financial results and operational efficiency. Notably, the improved wholesale margin in the third quarter of fiscal 2024 reflects ongoing loss improvements, approaching pre-COVID-19 levels of approximately 30 basis points as a percentage of sales. It anticipates further opportunities to reduce losses, thereby increasing profitability while maintaining strong customer and supplier relationships.

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Transformation on track

United Natural is actively engaged in a comprehensive transformation that includes several strategic elements. The company is driving toward improved margins and increased cash flow generation through targeted actions in four key areas – expanding and intensifying network optimization, reducing annual capital expenditures, optimizing cost structures and reducing net working capital.

As part of this initiative, management is implementing near-term value creation projects to drive operational efficiencies. Building on the progress made last year, the company intends to further improve its spend structure, targeting efficiencies comparable to the $150 million already realized. This optimization effort includes a consistent and strategic approach to customer and supplier engagement, as well as better aligning corporate resources in line with the updated strategy.

It plans to allocate approximately $300 million in capital spending in fiscal 2025, focusing on maintenance, targeted network improvements and technology updates. This strategy aims to optimize resource allocation, strengthen its overall business and balance sheet, and increase its ability to make strategic investments in higher-margin segments such as services.

Obstacles on the way

United Natural has been seeing a challenging industry backdrop for several quarters. Consumers are buying less to manage their budgets and are moving away from traditional grocery stores, likely looking for more affordable options such as discount stores, bulk purchases or online shopping. Net sales in the third quarter of fiscal 2024 declined slightly due to lower unit volumes.

UNFI is bearing the brunt of weakness in its retail business, a trend that continued into the fiscal third quarter. The company’s retail business has faced challenges due to significant price sensitivity among consumers in retail markets. We see factors such as economic pressures, reduced government support, changing consumer behavior and increased competition impacting consumer spending, which is concerning.

That said, United Natural’s emphasis on the benefits listed above will likely continue to drive the growth narrative. Shares of the Zacks Rank #3 (Hold) company are up 29.3% over the past three months versus the industry’s decline of 4%.

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