Food distributor United Natural Foods (UNFI) can't seem to catch a break for very long, and investors still are still not buying into the story. Shares, down 32% year-to-date, had put together quite a run six weeks ago, jumping 94% between August 15th and September 18th, seemingly driven by some management changes. Most of that recent gain has since evaporated, as worse than expected fourth quarter earnings, released on Monday, sent shares down 26% that day alone.
UNFI reported earnings per share of 44 cents, 11 cents below consensus. While revenue of $6.41 billion was about in-line with estimates, the 800 pound gorilla in the room remains the company's debt level. An earnings miss would likely have been more acceptable and less damaging if the company did not have $3 billion in debt. That's what the market is focusing on, and it's been the reason I've held off on taking a position.
It's a story I've been following for the past year, although it seems like an eternity. UNFI was an $83 stock in early 2015, which became a $35 stock by July of 2018. That's about where the journey to becoming a $7 stock began; that's when UNFI agreed to pay $32.50/share for SUPERVALU, which represented a 67% premium to that company's stock price. The kicker was that UNFI also assumed SUPERVALU's debt. It's been downhill for the most part ever since, as many believe that UNFI not only overpaid for SUPERVALU, but also over leveraged itself in the process. That's why UNFI currently trades for about 5x next year's consensus estimates, and that's why an earnings miss brings bigger than normal consequences.
Make no mistake, despite its rather small $400 million market cap, UNFI is a big company, which generated more than $21 billion in revenue in its just ended fiscal year. However, it is also a low margin business, so there's not a great deal of room for error, especially given the relatively large debt load. In cases where there is substantial debt, market cap alone does not tell the whole story, and it's important to look at a company's enterprise value (market cap minus cash plus debt). In UNFI's case, this equates to about $3.4 billion.
While most of the market hates this stock - Bank of America Merrill Lynch more than halved its price target on the stock to $4 - the contrarian in me will continue to follow the story. If UNFI could get its debt under control, or provide investors with some level of confidence that it can, this stock would be the proverbial 50 cent or perhaps even 25 cent dollar. But that is a big "if" especially in the current market environment where distressed names are not appreciated.
