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Can United Natural Gain on Strong Brands Despite High Costs?

Zacks

United Natural Foods, Inc. UNFI has been plagued by headwinds arising from high input and operating expenses like several other food companies. Nevertheless, it is managing to keep the business afloat on strong brands and strategies such as cost reduction. Let’s take a look.

Portfolio Boosting & Saving Efforts Bode Well

United Natural’s top line has been steadily expanding, courtesy of growth across channels, presence of strong brands and continued rise in consumer demand. Speaking of brands, acquisitions played an important role in boosting the company’s portfolio, distribution network and customer base. Some of the notable acquisitions of United Natural are Haddon House, Gourmet Guru, Nor-Cal Produce, Inc, Tony’s Fine Foods and Trudeau Distributing Company among others.

Moreover, the buyout of SUPERVALU has been supporting United Natural’s revenue growth, as witnessed in the third quarter of fiscal 2019. The merger provided better competing grounds to the company in the grocery space by augmenting offerings. We note that management is on track with the integration of the SUPERVALU conventional business. In this respect, United Natural is refurbishing the supply-chain network to better consolidate SUPERVALU’s distribution centers.

Apart from these, United Natural focuses on cost-reduction efforts. In this regard, it is on track to achieve cost savings of more than $36 million in fiscal 2019. Additionally, management expects costs savings of more than $185 million by the end of fiscal 2022. Such saving targets are likely to be achieved through the reduction of square footage occupied, among other efforts to optimize spending.

Soft Gross Margin & High Costs Ail

United Natural’s gross margin has been sluggish for a while. Notably, sales from lower-margin customers have been growing at a higher rate than others, which has been denting its gross margin rates.

Moreover, the company has been experiencing challenges at several distribution centers, driven by headwinds such as store closures and slower rate of growth at new stores. In fact, challenges being witnessed across some of the distribution networks led to enhanced transportation, labor and shrink costs.

Notably dismal gross margin along with higher operating expenses weighed on the company’s adjusted operating income in the fiscal third quarter. Continued rise in costs and adverse mix are likely to keep its margins under pressure. Other food companies such as Conagra Brands CAG, Sysco Corporation SYY and Kraft Heinz KHC are also grappling with rising expenses.

Wrapping up, we expect that robust cost-saving efforts and well-chalked moves will strengthen United Natural’s business and thereby cushion it from the aforementioned hurdles.

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