An All Organic SWOT

Josh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

One of the simplest ways to get an overview of a company's operations is through a SWOT analysis.  Here the main strengths, weaknesses, opportunities, and threats of the company are laid out for all to see.  Today, we will take a look at United Natural Foods (NASDAQ: UNFI) who was able to grow their stock price by 40% in 2012.  With a recent 10% selloff, we will see if now is the right time to jump in on the natural and organic food distributor.

Strengths:

Strong Relationship with Whole Foods- UNFI has been the primary supplier to Whole Foods Market (NASDAQ: WFM) for over 14 years and was recently able to lock up further business with the supermarket until 2020.  UNFI is Whole Foods' main distributor in every American region, which now accounts for 36% OF UNFI's total net sales, as it is its only supernatural chain.

Top-line Growth- Since 2002, UNFI has watched its revenues jump from $1.2 billion to its current level of $5.2 billion, which translates to 16% yearly growth.  As they stated in their most recent Investor Presentation, UNFI expects 12-14% sales growth in 2013 and annual sales Growth of 10-15% for the foreseeable future.  Provided EPS can follow this growth, the distributor looks poised to deliver impressive returns well down the road.

Market Leader- Along with privately operated KeHE Distributors, UNFI is one of only two national organic and natural food distributors in its space.  With KeHE being less than half the size of UNFI, it has become the early market share leader in its space.  More interestingly however, is that the annual market for Natural Products and Specialty Products are $90 Billion and $75 Billion respectively.  Whether it is through acquisition or simple organic market expansion, UNFI has a tremendous growth runway.

Weaknesses:

Acquisition Growth Strategy- Having made 10 major acquisitions since '98, UNFI readily admits in its 10-K that its major growth driver is via acquisitions.  While acquisition growth will certainly help UNFI as it goes down the road, it will be essential for them to continue to increase their market share simultaneously.  Organic and natural foods are going to be found in more refrigerators each passing year and it is pivotal that UNFI makes sure they helped put it there.

Debt/Cash- With only $9 million of cash on hand and 18 times more debt than cash, UNFI could run into a tricky financial situation if the market suddenly changed.  Being an acquisition based grower, UNFI is quick to use its cash and could struggle in a volatile market.

Skinny Margins- Posting a Gross Margin of 18%, a Profit Margin of 1.8%, and a Return on Assets of 5.8%, UNFI has frighteningly thin margins, which is more or less the norm in the grocery distribution business.  As they explain in their 10-K, they have a few major customers that receive large order discounts, which leaves UNFI constantly trying to lower its expenses.

Opportunities:

Canadian and Foreign Growth- After acquiring SunOpta's SDG Assets in 2010, UNFI Canada became the largest distributor of natural, organic, and specialty products in Canada.  Later in 2012, UNFI went on to buy another distributor in Ontario, as it furthered its Canadian dominance and locked in more future growth through the country.

Acquisitions- Along with its Canadian acquisitions, UNFI's major external growth driver has been through its long list of acquired businesses.  Being the true leader in its space in both America and Canada, UNFI is in a strong position to continue snapping up quality local distributors.  With high fragmentation in the natural and organic segment, UNFI will be able to find many quality business worth acquiring, but must make sure to do so at the right price.

Growth Through Whole Foods- As UNFI's strengths were previously mentioned, their relationship with Whole Foods can also be seen as an Opportunity.  Simply put, as Whole Foods expands, so should UNFI, at least through 2020 in regards to their current contract.  With Whole Foods posting 5 Year Revenue and EPS Growth of 10% and 20% respectively, UNFI has a large growth runway intact, from its largest customer alone.  In the words of Motley Fool's own Jason Moser in a Motley Fool Money podcast, "Whole Foods will continue to grow its footprint and UNFI will benefit from that."

Threats:

Reliance Upon Whole Foods- Just as much as it is a Strength and an Opportunity, UNFI is admittedly quite reliant upon Whole Foods.  If the current contract is unable to be managed for whatever reason, UNFI could potentially lose 30% of its revenue overnight.  Similarly, if Whole Foods were to stumble for any reason, it would wreak havoc on UNFI's bottom line.  Considering Whole Foods' current growth trajectory, they could potentially become an even larger portion of UNFI's revenue.

Distributor for Hain Celestial- UNFI is a major buyer and distributor for The Hain Celestial Group (NASDAQ: HAIN), as they account for 18% of the Hain's Revenues.  While this is not a major problem, it is noteworthy to see that UNFI relies on one source to buy many of its products, and leans on another to sell them in its Whole Foods partnership.  While UNFI does not buy more than 10% of any of its products from one supplier, Hain is responsible for 6% of UNFI's purchases.

Certifications- Simply put, UNFI has to maintain certifications for a wide variety of things, from keeping its multiple green-friendly LEED certifications, or continuing to hold its "Certified Organic Distributor" from Quality Assurance International.  Throw in the fun and excitement of moving into Canada and it is clear to see that UNFI has its hands full maintaining its pristine image wherever it goes.

Foolish Final Thoughts

United Natural Foods seems to have a solid growth runway ahead with their Whole Foods partnership, their expansion into Canada, and their prowess for making quality acquisitions.  As the natural, organic, ethnic, and kosher markets continue to rapidly grow, UNFI will have further room to grow by expanding its current operations to new customers.  

Trading at 21x Forward Earnings, UNFI looks to be a cheaper way to trade Whole Foods' growth story, who currently trades at 27x Forward Earnings.  Much like UNFI, Hain Celestial trades at 20x Forward Earnings, but hasn't seen quite the EPS growth in comparison over the last decade.  While all three stocks are on my watchlist, I believe that United Natural Foods is the most attractive of the three and is worthy of a 5+ year CAPS pick.


joryko has no positions in the stocks mentioned above. The Motley Fool owns shares of Hain Celestial and Whole Foods Market. Motley Fool newsletter services recommend Hain Celestial and Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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