One of the more interesting earnings releases this week came from United Natural Foods (UNFI) , which has rallied during the pandemic. The stock traded below $6 in March but eclipsed $20 in May, then again in August. Yet despite United Natural Foods posting fourth-quarter results that were much better than expected after the market closed on Monday, UNFI shares endured a 14% haircut on Tuesday.
Earnings per share of $1.06 easily beat the 64-cent consensus, while revenue of $6.75 billion was also better than the $6.6 billion predicted by the seven analysts covering UNFI. It looked like a great quarter for a name that has had difficulty gaining acceptance since it acquired SuperValu in 2018. However, the solid earnings report was overshadowed by the announcement that CEO Steven Spinner is retiring, and investors took some money off the table.
The one big knock on United Natural Foods has been its debt, much of it the result of the SuperValu acquisition. The company clearly overpaid in that deal and leveraged itself to the hilt in the process. That's part of the reason why UNFI typically has traded at a low single-digit price-to-earnings (P/E) ratio, in addition to the fact that it is a very low-margin business.
United Natural Foods has made some progress on the debt issue, reducing it by $400 million over the past year to $2.74 billion. The ratio of net debt to EBITDA fell from 5.4x in the first quarter to 4.0x in the fourth quarter, another step in the right direction. However, there is still a lot of work to do there; it is still too much debt to make shareholders comfortable. Major coming debt maturities will occur in October 2023 ($757 million) and two years later ($1.77 billion).
The company is projecting revenue next year of $27 billion to $27.8 billion, adjusted EBITDA in the range of $690 million to $730 million, and adjusted earnings per share in the range of $3.05 to $3.55. That puts the forward P/E ratio in the 4.5-5.5 range. UNFI is also forecasting another $300 million in debt reduction.
UNFI was a member of last year's Tax Loss Selling Recovery Portfolio, but unfortunately it ended up being the worst performer in the group. One year later, it has knocked the cover off the ball.
Still, whenever I see the ticker symbol "UNFI" -- a ticker that makes sense given the company's name -- I can't help but see "UNFIT." Maybe it's time for a ticker change; I believe NTRL may be available.
