The United Natural Foods (UNFI) story continues to unfold in interesting ways. Just one year ago shares were trading in the $50 range, but a move the company made in late July has weighed on it ever since. On July 26th, UNFI made a bid for SUPERVALU for $32.50/share, a 67% premium, which rescued SUPERVALU. That deal turned some heads at the time, if for no other reason than that UNFI was also assuming SUPERVALU's heavy debt load.
It's been all downhill since for UNFI, which fell below $10 in December, after reporting worse than expected third quarter earnings in September, and repeating that for fourth quarter results released in early December.
I did name UNFI as a potential tax-loss selling recovery candidate for 2019, but the path the stock is taking became downright interesting earlier this week. On Wednesday, UNFI rose 28% on heavy volume, eclipsing $15 for the first time since early December. The catalyst for that move was a very detailed Investor Day presentation given by the company that afternoon that resulted in a trading halt.
The big takeaways, and probably what got investors exited, were company earnings guidance for 2019 (earnings per share of $1.69-$1.89, above the $1.65 consensus), and a look ahead to 2022, where the company projected revenue in the $27- $27.5 billion range, with adjusted EBITDA of $875- $925 million.
The company also addressed what I, and I believe concerns other investors most about UNFI, that being the company's $4 billion in debt. While UNFI's market cap is just $648 million, debt pushes it's enterprise value to nearly $4.6 billion, a number that investor's need to be mindful of. To just look at the market cap in this case, given the large level of debt, is shortsighted.
UNFI did address the debt in its presentation, and suggested that it could de-leverage (defined in this case as face value of debt/adjusted EBITDA) from 5.1X now to 2.9X in 2022, with a target of between 2X and 2.5X. The company also reiterated the fact that most of its debt matures in 2023-2025.
Now UNFI has to deliver on the de-levering (pun intended), which is no small feat, and will have to meet or exceed earnings expectations in order to restore investor confidence.
UNFI's Wednesday uptick, however, was very-short-lived. On Thursday, shares gave back 18%, also on heavy volume, erasing much of Thursday's gain. The markets giveth and the markets taketh away, and remain skeptical about UNFI, as do I.
Consensus estimates for next year put the forward price earnings ratio at less than 7, which is very compelling. However, the combined company has not yet proven that it can deliver on earnings and synergies, and that pesky $4 billion in debt remains the elephant in the room.
I may nibble on this one at some point, but have not been able to bring myself to take the UNFI debt plunge just yet.
