In the span of a few months, shares of United Natural Foods (UNFI) have fallen by nearly 50%, or more than $2 billion in market valuation. A stock for which investors were willing to pay 30x earnings now can be bought for less than 17x earnings. Investors looking for a quality company with solid long-term growth potential may want to keep an eye on UNFI.
The principal reason for its decline in market value was an announcement last week that UNFI's distribution contract with Albertson's will terminate in September 2015 instead of the original contract date of July 31, 2016. According to UNFI, the approximate annual revenue from this partnership was $410 million. With UNFI's annual sales of nearly $8 billion, the Alberston's deal represents about 5% of its overall revenue.
I believe the market reaction has opened the door for investors. For those unaware, UNFI is the pre-eminent distributor of natural and organic foods to supermarkets and retail stores in the U.S. and Canada. The company distributes about 80,000 products covering all major product categories: grocery, produce, perishables, supplements, food service products, and personal care products. What Sysco (SYY) is to the traditional food service industry, United Natural Foods is to the natural and organic food business.
Not surprisingly, UNFI's biggest customer is Whole Foods (WFM), a relationship that has existed for years and is likely to remain. Whole Foods has no other distributor that can offer the depth of products that UNFI offers. UNFI's infrastructure can't be replicated quickly. With an enterprise value of $3 billion, a player such as Sysco would find it far more attractive to pay a premium and acquire UNFI than try to duplicate the company's existing infrastructure, which consists of 33 distribution centers, 7.8 million square feet of warehouse space, and a state-of-the-art supply chain and logistics system.
UNFI essentially operates in a duopolistic industry with one national competitor, privately held KeHE Distribution. Interestingly enough, KeHe recently announced that it had signed a new distribution agreement with Albertson's. In its latest fiscal year, KeHE generated $2.8 billion in sales, so it's definitely a player in the industry, although it is less than half UNFI's size.
The opportunity here is based on valuation and quality. UNFI has built a dominant market position and continues to pursue market share aggressively. The market is highly fragmented with more than 200 local and regional distributors than can't match the scale of UNFI. Sysco today is being valued at nearly 50% of revenues compared with 29% of revenues for UNFI. Yet UNFI is growing revenues by double digits each year compared to low single digits for Sysco.
Once the dust settles, the market's appetite for a quality growing business such as UNFI in a highly attractive industry once again will attract attention.
